The strong performance of its two main Hong Kong-listed comparables û China Communications Construction Co (CCCC) and China Railway Group û since they came to market in December 2006 and December 2007 is likely to have added to the enthusiasm.
Having already pocketed the maximum from the A-share portion a week earlier, CRCC became the first listing candidate globally to complete an IPO of more than $5 billion this year. The second largest deal is IndiaÆs Reliance Power, which raised $3 billion in January. CRCCÆs two tranches raised a combined $5.4 billion, which could increase to $5.8 billion, if the greenshoe on the H-share offer is also exercised in full.
The stock will start trading in Shanghai on Monday and in Hong Kong three days later on March 13.
Retail investors, who have been highly sceptical towards most other IPO candidates in Hong Kong this year, turned out in force for this one. According to sources they jointly subscribed for 291 times the number of shares that had been set aside for them, tying up HK$531 billion ($68 billion) and making this by far the most popular Hong Kong IPO with the retail public. That honour was previously held by Alibaba.com which attracted HK$447 billion worth of retail orders when it went public in October last year.
The overwhelming demand triggered a full clawback that will boost the size of the retail tranche to 25% from 10% initially. The remaining institutional tranche - after adjusting for the clawback and deducting the $450 million worth of shares set aside for nine cornerstone investors û was close to 80 times covered. The sources say more than 800 investors submitted orders for the deal, which is only the second Hong Kong listing candidate to make it as far as pricing this year.
The first one was drill rig manufacturer Honghua Group, which is due to start trading today after raising $409 million. Four other IPOs were launched in January, but were pulled before pricing due to the difficult market conditions. While the sentiment for new listings appear to have become slightly more favourable since then û there are currently two more offerings on the road trying to raise a combined $3.5 billion û the Hong Kong market is still volatile and easily affected by what happens in the US and Europe overnight.
Bankers are hoping that the strong demand for CRCC will create some much needed positive momentum for the other Hong Kong IPOs in the pipeline, but they are also keenly aware that this could be a one-off case where the combination of an infrastructure theme and the sheer size of the offering led to an accelerated order inflow. For the IPO market as a whole, todayÆs trading debut of Honghua may therefore be even more important. The debut comes after the Hang Seng Index fell 5% over the first three days this week, and while it was up 1% yesterday Wall Street had another weak session overnight which could once again nip any emerging optimism in the bud. The Hang Seng Index is still down 16% year-to-date.
The other two companies in the market are ChinaÆs largest rice cracker producer Want Want, which is seeking to raise up to $1.4 billion, and property developer Evergrande Real Estate Holdings, which began taking orders for an offering of up to $2.1 billion yesterday. China Pacific Insurance also started to sound out the market for an IPO of at least $3.2 billion earlier this week, although sources say the final decision on whether to go ahead with the actual deal will depend on investor feedback.
CRCCÆs final price at the top of the HK$9.93 to HK$10.70 range values the company at 28.7 times its projected 2008 earnings, but is at the low end of the 28 to 33 times that one syndicate research analyst considers to be fair value. It also marks a discount of between 11% and 23% versus its Hong Kong-listed peers, which have held up well during CRCCÆs roadshow. CCCC, which specialises in the design and construction of ports, has even traded up slightly. According to Bloomberg data it currently trades at a 2008 P/E multiple of 32.3 times and has risen 338% since its IPO in December 2006.
China Railway Group, which is the largest construction company in China and Asia with a focus on transportation infrastructure and municipal works, trades at a 2008 P/E multiple of 37.4 times after gaining 52% since its trading debut in early December last year.
CRCC offered 1.706 billion new H-shares, which account for 14% of the company, or 15.8% if the 15% greenshoe is exercised in full. The A-share portion, which was reduced to 2.45 billion shares from 2.8 billion at the last minute, accounts for 20%, although this will fall to 19.7% if the greenshoe on the H-share offering it put to use. The A-share offer has no greenshoe.
The nine cornerstone investors, who each bought $50 million worth of shares, consisted for the most part of usual suspects like Temasek, the Government of Singapore Investment Corporation, Lee Shau Kee, Citic Pacific, China Life Insurance, Chow Tai Fook, Bank of China and Cheung Kong (Holdings). They were accompanied by Yale University, which is a relative newcomer as a cornerstone on Hong Kong IPOs.
The final H-share price is at an 8% premium to the A-share price, even though the latter was also priced at the top of the indicated range. Chinese regulators had stipulated that the H-shares could not be priced below the A-shares and thus the bookrunners chose to set the entire H-share offering range slightly above the top end of the A-share range. The final A-share price of Rmb9.08 is equal to about HK$9.91.
The state-owned company, which is primarily active within infrastructure construction, have, by its own admission, been involved in the construction of almost all railway lines in China since 1949 and is also the largest provider of highway construction services, with a specific focus on freeways, bridges and tunnels. It is currently engaged in 137 overseas projects in 27 different countries. Just before the launch of the IPO, it won the contracts for the construction of two railway lines in Libya with a total value of about $2.6 billion.
According to the preliminary listing document, CRCC will use 80% of the H-share proceeds to buy equipment, in particular for railway and light rail infrastructure construction projects in Nigeria, Saudi Arabia and Israel and for some of its ongoing highway projects.
The H-share offering was jointly arranged by Citi, Citic Securities and Macquarie Capital, while the Citic Securities was the sole on the A-share portion.
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