China's megacity dream spurs Hebei Construction IPO

Privately-held construction firm seeks public capital as China speeds up development of the Beijing-Tianjin-Hebei region, including plans for a vast new city in rural Xiongan.
Rapid development in Xiongan, the future mega city that will integrate some of Beijing's non-core functions
Rapid development in Xiongan, the future mega city that will integrate some of Beijing's non-core functions

Hebei Construction Group on Monday launched a Hong Kong initial public offering, becoming the first company to tap investor interest in China’s ambitious Xiongan special zone plan.

The company hopes to raise between HK$1.9 billion and HK$2.3 billion ($248 million to $297 million) from the deal as its home province of Hebei becomes the focus of another major Chinese development plan.

China’s Xiongan initiative may be little known among international investors now, but it is every bit as big a national priority as the landmark Belt and Road Initiative. Along with Belt and Road, Xiongan is one of only a handful of national-level development plans unveiled directly by Beijing's ruling State Council under the instruction of President Xi Jinping.

It centres on Xiongan county in Hebei, a province in northern China. The previously underdeveloped district became an investment sensation in April, when Beijing announced plans for a special economic zone there that will support the neighbouring metropolises of Beijing and Tianjin.

Under the State Council's plan, Xiongan will ease the pressure on Beijing by taking out some functions unrelated to its role as the nation's capital. By building a new hub for culture, education and healthcare, the government hopes to ease chronic problems such as overcrowding, pollution and congestion in the capital.

The 100-square kilometre city will become only the third national-level economic zone after the Shenzhen Special Economic Zone, built in the 1980s to support China’s economic reform, and Shanghai Pudong Special Economic Zone, designed as a new financial district dubbed China’s Wall Street.

The market has responded quickly to Xiongan’s rising strategic importance, drawing as much as Rmb10 billion ($1.5 billion) of capital into the so-called Xiongan concept stocks in the energy, real estate and construction sectors.

Property prices in Xiongan have more than doubled since last year, causing the local government to order an abrupt suspension of property transactions just days after the official announcement.

Local king

Hebei Construction is a natural fit for the Xiongan play both in terms of its geographical and industry focus. The homegrown company is Hebei's largest private construction company with a focus on building and infrastructure projects such as toll roads and industrial facilities.

In its marketing material, Hebei Construction says it is poised to benefit from the development of the Beijing-Tianjin-Hebei region, which will involve Rmb600 billion worth of infrastructure investment over the next five years. The region’s construction sector is estimated to grow at an annual rate of 7.9% over the next five years, which is more than twice the national average of 3.6%, according to the marketing material.

In response to the lack of detailed planning for Xiongan's development, company president Shang Jinfeng said he believes the State Council will roll out details soon since it has set out targets for the city to complete the first phase of development by 2020.

The company generated 60% of its revenue from building and construction projects last year, counting leading real estate developers such as Evergrande, Vanke and Country Garden among its main customers. About 30% of its revenue came from infrastructure development.

Some of its prominent projects include the construction of the art and design building at the Beijing University of Technology, and the passenger terminal at the Handan airport in Hebei.

Hebei Construction pointed to a contract backlog of Rmb343.5 billion, equivalent to nearly its full-year revenue last year, as the backbone for its future development.

Deal terms

Hebei Construction’s 433.3 million-share IPO is being pitched at a price range of HK$4.46 to HK$5.36 per share. In terms of price-to-book, it is being marketed at 5.1 times to 6.1 times one-year forward earnings on a syndicate consensus basis, according to a source familiar with the situation.

Syndicate analysts are generally pitching Hebei Construction against state-owned construction companies such as China Railway Group, China Railway Construction Corporation (CRCC) and China State Construction International.

Even at the most expensive end of the price range, Hebei Construction will be valued at a significant discount to the trio of companies, which now trade at 7.7, 6.7 and 8.6 times their respective estimated 2018 earnings.

These state-owned companies are much larger than Hebei Construction’s estimated market value of $1.2 billion, but their earnings growth projections are lower because they focus on sizable projects with lower margins. Their nationwide focus also means they are unlikely to match Hebei Construction’s expected high growth in the Beijing-Tianjin-Hebei region.

Old industry

As it stands, the privately-held construction firm could also serve as a timely gauge of market sentiment over investing in the so-called traditional industries, following a slew of new economy companies in Hong Kong’s IPO market.

In a recent research report, Citic CLSA said it is bullish on traditional industry stocks because there is little room for new economy stocks to grow in the near future after nearly a full-year rally.

Hebei Construction secured only one cornerstone investor – a $45 million ticket from Shanghai Zhongji Investment. It is a clear indication that the market will play a decisive role in setting the pricing; the cornerstone investment accounts for only 18% of the IPO even at the lower end of the valuation guidance.

Joint sponsors of the IPO are CICC and CMB International. They are also joint global coordinators alongside Zhongtai International.

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