CPMC and China High Precision IPOs raise a combined $267 million

CPMC encounters high levels of demand as two more small-cap companies succeed in raising capital.

Two Chinese small-cap companies priced their Hong Kong initial public offerings on Friday, raising a combined HK$2.07 billion ($267 million). Metal-packaging company CPMC Holdings raised HK$1.07 billion and China High Precision Automation Group (CHP) tapped the market for HK$1 billion.

CPMC sold 200 million primary shares at HK$5.39 apiece, the top of an indicative range that started at HK$3.85.

Retail investors flocked to the deal, with the Hong Kong public offer approximately 200 times covered. This triggered the largest possible clawback and left 50% of the total offering in the hands of individual investors, up from the initial 10%. There were also three cornerstone investors who together took 16.5% of the deal. They were China Resources (Holdings) Company, CCB International Asset Management, and JDB, which is also the company's main customer.

So there wasn't much left for institutions -- the remaining 33.5% of the deal, approximately $46 million worth of shares, was split between 130 accounts. The institutional tranche was 60 times covered leading to a situation where a number of investors had their orders scaled back. All geographical regions were well represented.

One source said the company was popular for a couple of reasons. First, investors saw its key product -- metal containers -- as a proxy for Chinese consumption; if people buy more packaged products, CPMC will need to produce more containers. Second, international investors were comfortable with the company's main shareholder, Cofco Group, one of China's largest food businesses, which has a reputation for strong corporate governance.

CPMC is China's largest metal-packaging company in terms of turnover with a 6.4% market share. Its main focus is on beverage cans and its main customer is JDB, the company that makes the herbal tea drink Wang Laoji, which accounted for 50% of CPMC's sales in the first half of 2009. CPMC also makes metal caps, steel barrels and the packaging for aerosols.

The final price values the company at 18.6 times 2010 projected earnings. There are no direct comparables listed in Hong Kong, although some research reports compared CPMC to Hong Kong-listed Chinese companies in the food and beverage sector, such as Tingyi Holdings and Want Want China, which are trading at price-to-earnings multiples of around 15 times and 18 times respectively. There is also a US company in the same industry, Ball Corporation, which trades at around 12 times 2010 projected earnings.

The other company to price on Friday, CHP, raised HK$1 billion ($129 million). It is in the business of producing high-precision industrial automation instruments, with a focus on the middle and high-end of the market. Its main products are detectors, indicators and controllers. It also has a horological division, making the parts used in quartz watches.

CHP sold 250 million shares at HK$4 each, in the bottom half of its indicative range of HK$3.50 to HK$4.80 a share. The final price left the book multiply times covered with an international investor base consisting mostly of long-only funds.

One of CHP's main selling points was that it is not particularly exposed to one particular sector -- it sells instruments used in optics, healthcare, vehicles, industrial automation and electronics. And if, as some analysts believe, China's manufacturing sector is becoming more sophisticated, CHP should perform well, because it will supply manufacturers in need of precision parts.

Both of these IPOs are relatively small companies in niche industries that are taking advantage of the rebounding markets to raise capital. And when it comes to aftermarket performance, such companies have performed somewhat better than their larger competitors. Some notable examples are Shenguan Holdings (Group), a manufacturer of edible sausage coating that raised $160 million, and Ausnutria Dairy Corporation, a baby milk producer that raised $155 million, both in early October. Shenguan jumped 28% on its debut and it is now trading 35% above its IPO price. Ausnustria also did well; it climbed 21% on its debut and is now 43% above its issue price.

Alongside their larger deals, BOC International and Macquarie have both been active in this space. The Australian bank was a bookrunner on both the Shenguan and Ausnutria deals. BOCI also worked on Ausnutria. The same banks are also involved in these latest small-cap IPOs; BOCI was a joint bookrunner with China International Capital Corp on the CMPC deal, while Macquarie ran the books together with Daiwa Securities for CHP.

CHP will debut on Friday, while CMPC is expected to start trading on November 16. 

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