Chongqing Machinery prices IPO at bottom

The final price of HK$1.30 a share leaves the state-owned industrial conglomerate with $167 million to expand its product portfolio.
Western China's largest industrial conglomerate, Chongqing Machinery and Electric, has priced its initial public offering at the bottom of the indicated range of HK$1.30 to HK$1.70 a share.

This continues a trend of Hong Kong IPOs pricing at the bottom, making Little Sheep's pricing at the mid-point last week a notable exception rather than a sign that things were picking up.

Indeed, H-share companies came under extensive selling pressure yesterday after China announced it will tighten the reserve requirement ratio for banks by a full percentage point in two steps this month, and weak employment data and a surge in oil prices sent US stocks tumbling on Monday. The sell-off saw the H-share index lose 5.3% of its value, while the Hang Seng Index broke through what was considered a key support level at 24,000 points and finished the day 4.2% lower at 23,375. If this poor sentiment persists, it could make Chongqing MachineryÆs trading debut on Friday a real challenge û especially since the order book was said to have contained more hedge funds than long-only accounts.

At HK$1.30 a share, the company is valued at a price-to-earnings ratio of 9.2 times, based on profit estimates for 2008. This represents a 36% discount to Shanghai Electric, which is viewed as its closest comparable, but on a par with Shanghai Prime Machinery, a sister company of Shanghai Electric that is primarily engaged in the design and manufacturing of turbine blades, precision parts and components. Shanghai Prime is currently trading at 9.3 times its projected 2008 earnings.

Both these companies gained slightly in the first week of Chongqing MachineryÆs bookbuilding, but came under pressure in the four days before the pricing last Friday, with Shanghai Electric sliding 6.5% and Shanghai Prime down 4.2%.

The company sold 27% of its share capital in the form of 1.004 billion new H-shares, which brings the base deal size to HK$1.3 billion ($167 million). There is also an additional greenshoe of 15% that could boost the total proceeds to as much as $192 million if fully exercised. Credit Suisse was the sole bookrunner.

A source close to the deal says the institutional tranche was ôcomfortablyö covered, while the 10% retail tranche attracted subscriptions for five times the number of shares earmarked for it. Looking at the institutional investors, the geographical spread was skewed towards Asia, with hedge funds outnumbering long-only funds. Although long funds found the companyÆs price-to-earnings ratio attractive, says the source, many were put off by the complexity of the business. The company has four divisions at present û vehicle parts, power equipment, general machinery and computer numerical control tools û each with its own product portfolio. To further complicate things, the new capital will be used to expand its current product range even further.

Given the jittery market backdrop, sources say it was impossible for Chongqing Machinery to achieve more than the minimum price even though the companyÆs fundamentals look promising. For one, it has recorded a healthy growth in revenue û in 2007 its turnover was HK$5.4 billion ($692.3 million), a year-on-year increase of 28% û and its location, Chongqing, is a focal point for development by the Chinese government. On the flipside though, the city is close to the area in Sichuan that was struck by the earthquake last month, and as a company that is heavily dependent on raw materials like steel and copper, further rises in commodity prices could cut deeply into margins.
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