Chinalco’s engineering unit targets $221 million in IPO

The Hong Kong offering comes armed with six cornerstone investors and enough anchor demand to cover the entire base deal at launch. Separately, China Nonferrous Mining will resume its IPO today after securing a similar level of demand.

China Aluminum International Engineering Corp (Chalieco) kicked off the management roadshow yesterday for an initial public offering that is targeting to raise between HK$1.43 billion and HK$1.72 billion ($184 million to $221 million).

Despite the initial euphoria following Greece’s elections at the weekend, market sentiment remains generally cautious and Chalieco launched the deal only after securing a group of cornerstone investors who will take up $100 million worth of shares. The six Chinese investors, who will be subject to a lock-up period of six months, include Seventh Metallurgical Construction, which is investing $35 million.

On top of that, there was also enough anchor demand to cover the entire base deal at launch, a source said.

Such precaution comes as no surprise as mid-cap IPOs out of China have been largely ignored by international institutions this year and for many issuers the best chance of achieving a listing at the moment is to opt for a club deal. The latter typically refers to a deal that is primarily taken up by a small number of investors, often Chinese corporates that may or may not have links to the company or its owners.

Another deal that will be done on that basis is China Nonferrous Mining Corp (CNMC), which will finally launch the retail portion for its $235 million to $314 million offering today. The deal was put on hold in late May after the retail offering had already been postponed by one-and-a-half weeks, as the Africa-based copper miner supposedly wanted to give a couple of potentially big Chinese investors more time to look at the transaction.

Some observers were sceptical that the deal could be salvaged in the current market environment but, according to a source, it will resume today at unchanged terms. However, the bookrunners (CICC, J.P. Morgan and UBS) have secured two more cornerstone investors, increasing the size of the cornerstone tranche to $85 million from $70 million, and have also drummed up enough additional demand from corporate Chinese investors to cover the deal in full. The deal will be open until Monday to give retail investors the obligatory three-and-a-half days to subscribe, although sources say they don’t expect much incremental demand.

Hong Kong’s Hang Seng Index ended almost unchanged yesterday, but has lost about 10% from this year’s peak in February as stocks have been hit globally by worries about the escalating eurozone crisis.

Chalieco, which is currently wholly owned by Aluminum Corporation of China (Chinalco) and hence a sister company of Hong Kong-listed Aluminum Corp of China Limited (Chalco), is selling 363.16 million shares at a price ranging from HK$3.93 to HK$4.73 apiece. The base deal represents about 13.6% of the enlarged share capital. There is also a 15% greenshoe option, which could increase the total deal size to as much as $255 million. All shares are new.

Retail investors will get 10% of the base deal, while the remaining 90% will be offered to institutional investors.

In addition to Seventh Metallurgical Construction, the remaining five cornerstone investors are: Yunnan Tin (Hong Kong) Yuan Xin Company, China XD Group and Beijing Jundao Technology Development, which are taking $15 million each, and Yunnan Aluminum International Company and Jiangxi Transformer Science & Technology, which are investing $10 million apiece.

The company had originally planned to raise as much as $500 million, but the recent decline in global stock markets and the poor sentiment for IPOs have forced it to revise its expectations. The deal was postponed in March due to process- and legal documentation-related reasons, the source said.

CICC is the sole global coordinator and joint bookrunner with Guangfa. Morgan Stanley and UBS were also appointed as joint bookrunners initially, but are no longer working on the deal, likely due to issues related to the company’s businesses in Iran, sources said. Some media reports said in March that the political tension between the US and Iran was having an impact on the IPO.

According to the prospectus, Chalieco entered into two contracts with an Iranian company and an independent third party in 2005 and 2008 to design and construct an aluminium smelting plant in Iran. But the company said it cancelled those contracts on May 8 this year.

“We currently do not have any business with or within these sanctioned countries,” the company said in the prospectus, referring to countries which are the targets of economic sanctions imposed by the US and other jurisdictions. Targeted countries include Cuba, Sudan, North Korea, Iran, Syria and Myanmar.

Chalieco provides technology, engineering services and equipment for the nonferrous metals industry in China. It has business operations in all provinces in mainland China, as well as overseas projects in Vietnam, India, Mozambique and Saudi Arabia. However, about 85% of its revenues came from China in 2011, according to the prospectus.

The company’s earnings have been improving in recent years. In the year ended December 31, 2011, it booked Rmb1.17 billion ($185 million) in operating profits, compared to Rmb545.9 million in 2009.

Chalieco has a number of comparables, but one of the closest is China State Construction International. The IPO price range values Chalieco at a 2012 price-to-earnings ratio of between 7.5 times and 9.1 times pre-shoe, the source said. That compares with 11.5 times for China State Construction International.

Chalieco plans to use part of the proceeds for engineering and construction contracting projects, as well as for research and development.

According to the current timetable, the order book is expected to close on June 27, and the final price is expected to be fixed the next day. The listing is scheduled for July 6.

The Hong Kong public offering will run from June 22 to 27.

Chinalco’s Peru unit, Chinalco Mining, is also currently testing investor appetite for a Hong Kong IPO that it hopes will raise about $1 billion.

¬ Haymarket Media Limited. All rights reserved.
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