Chinese train maker's IPO back on track

China South Locomotive kicks off the A-share portion of its offering today after a belated approval from the Chinese regulator. The H-share tranche will follow on August 4.
Just as investors thought they would have to wait another month for China South Locomotive & Rolling StockÆs (CSR) initial public offering, the Chinese securities regulator came through with the final approval that enables the near-simultaneous A- and H-share offering to go ahead. The combined deal could raise as much as $2 billion.

Wasting no time, the company said in an announcement posted on the Shanghai Stock Exchange (SSE) website yesterday that it will start the three-day price discovery process and management roadshow for the A-share portion of the offering today and that it expects to have a price range by Friday. This will clear the way for the H-share portion, with the international roadshow and the bookbuilding now scheduled to kick off next Monday. Sources say the H-share bookbuilding will last eight days and the final price will be determined shortly after the close of the offering on August 13.

The China Securities Regulatory Commission (CSRC) had initially indicated that it would give the final A-share approval on either Friday, July 18 or the following Monday, but this didnÆt happen and the lack of any clear answer on when the go-ahead could be expected had given rise to a belief that the CSRC didnÆt want any more IPOs before the Olympics. This proved incorrect, but the one-week delay means the final days of the H-share offering will now coincide with the first few days of the Olympics, when some investors may be more focused on fast runners than fast trains.

Sources close to the H-share offering say they donÆt worry about this overlap, however, as institutional investors have known that this deal was coming for some time already and will have enough time to prepare their orders even if they plan to make a trip to Beijing or spend a few days off in front of the TV. The feedback suggests investors remain keen on a company like CSR with exposure to ChinaÆs infrastructure build-out.

The listing candidate is ChinaÆs largest manufacturer of railway rolling stock, with a product line that spans everything that rolls on top of the rails, including engines, passenger carriages and freight wagons. It also gets part of its income from maintenance and servicing contracts, and leasing. This means it is impacted by the same macro issues as China Railway Group and China Railway Construction Corp (CRCC), which build the actual railways (among other things). Both these stocks have held up relatively well despite the troublesome markets, with gains of 9.9% and 11.2% since their respective IPOs in December and March.

The Chinese government plans to invest on average more than Rmb100 billion ($15 billion) per year in various railway construction projects until 2020. One syndicate research report notes that with the development of 55 new rapid transit lines in some 14 cities, China will need a total of 6,000 rapid transit vehicles by 2010, which compares with a total production of 654 such vehicles in 2006.

ôThe offering should attract a lot of interest as long as they donÆt run into an issue where the price of the H-share tranche has to be set too high,ö says one observer, referring to the fact that the price on the H-share portion of the deal needs to be above the A-share price. Given the continuing pressure on the secondary A-share market, it seems unlikely that the A-share price range will be set too high for comfort, however. China Railway and CRCC both completed similar near-simultaneous A- and H-share IPOs without any such problems.

Mainland investors will be able to subscribe for the A-shares on Monday and Tuesday next week (August 4 and 5) and the final A-share price will be announced by August 7 when there are still five days left of the H-share bookbuilding.

The H-share offer, which is arranged by joint bookrunners China International Capital Corp (CICC) and Macquarie, will comprise 1.6 billion new shares and will account for about 14% of the company. It will also have a greenshoe that could increase the deal size by another 15%. As usual, 10% of the offering will be set aside for Hong Kong retail investors in a 3.5-day offering that will kick off on August 8. Depending on the price, sources say the company is aiming to raise $600 million to $700 million from this portion alone and another $1.1 billion to $1.25 billion from the A-share portion.

In a translated version of the document published on the SSE website, CSR repeated that it will sell up to 3 billion A-shares, of which up to 750 million shares, or 25%, will be sold to institutional investors. The remaining 2.25 billion shares will be offered to retail investors. CICC and Industrial Securities are the lead underwriters.

CSR didnÆt specify when it expects its two classes of shares to start trading, but in Hong Kong the trading debut typically falls one week after the final price has been set, suggesting August 21 as a likely date. And based on the timetable used for China Railway and CRCC, the A-shares will start trading after the H-share pricing but before the H-share trading debut.
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