Chongqing Water raises $511 million to quench its capital thirst

The Chinese water supplier comes to market at a time of severe drought near its base in southwestern China, and even together with a lower-than-average IPO valuation, demand from investors isn't overwhelming.

Chongqing Water Group has raised Rmb3.49 billion ($511 million) from a Shanghai initial public offering after fixing the price at the top end of an indicated range that was set lower than average to stimulate investor appetite.

The company sold 500 million new A-shares, or 11.6% of its enlarged share capital, at Rmb6.98 apiece. The final price marked the top end of an offering range that started at Rmb6.48, and translated into a 2009 price-to-earnings ratio of 34.9 times, the company said in a statement to the Shanghai Stock Exchange.

The valuation is below the average historical P/E ratio of around 45 to 50 times for water supply and environment protection-related companies that have listed on the Shanghai and Shenzhen stock exchanges, analysts say.

In the past, Chinese companies typically priced their Shanghai IPOs at around 50 times historical earnings or more, but that changed earlier this year when a muted market response caused China XD Electric to fall below its IPO price on the first trading day and China First Heavy failed to raise the maximum amount it was targeting. Mainland issuers have since become more wary of the valuations of their offerings.

Chongqing Water comes to market at a time when water companies are drawing unprecedented attention as millions of people in the southwestern region of China, adjacent to Chongqing, face water shortages due to the worst drought in decades.

The drought, which has dried up rivers and is threatening vast farmlands, has forced local governments to tap underground water sources and use cloud seeding to produce rain for agricultural production, according to the National Meteorological Centre.

Water supply is not enough even without the drought. More than 500 out of a total of 663 cities in China do not have sufficient water supply, Chongqing Water said in its IPO prospectus. China accounts for a fifth of the world's total population, but the country has only 7% of the world's entire water supply, it said.

Concerns about the drought didn't help the company attract more orders. The deal, which was bought to market by China Galaxy Securities, was 27.7 times covered by institutional investors who were offered 45% of the shares. The remaining 55% was targeted at all investors, including retail, and was 66 times subscribed. There is no greenshoe option in the deal.

In the past, an IPO of decent size would easily have achieved a subscription rate of 100 times or more from both institutional and retail investors.

Chongqing Water, which provides tap water as well as sewage treatment, will use the proceeds raised from the deal to expand its capacity and to improve technology. It said in a statement it would try to list on the Shanghai Stock Exchange as soon as its IPO was completed, but didn't give a specific date.

"Chinese companies from all industries are in need of capital to support their growth, but those with newer kinds of businesses such as new energy and environmental protection will be more popular," said Peter So, head of research at CCB International.

He forecasts that the Shanghai Composite Index will reach 3,700 points by the end of this year, up from 3,074 points yesterday. The index has fallen 5.2% this year, while Hong Kong's Hang Seng Index is down by 3.4%.

The largest IPO in Shanghai this year was that of Huatai Securities, which raised $2.3 billion by selling 784.6 million primary A-shares at Rmb20 apiece. The final price valued the brokerage at 29 times last year's earnings, which was lower than its listed peers. Huatai took this careful approach after five of this year's market newcomers dropped on their first day of trading.

China First Heavy raised $1.67 billion in its Shanghai IPO, compared to a target of $1.7 billion. While seemingly an insignificant difference, the heavy machinery maker was the first company to price an IPO below the top of the indicated range since China reopened its IPO market last July.

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