CRCC High-Tech Equipment’s HK$3.06 billion ($395 million) initial public offering launched on Monday could well be the first Chinese state-owned deal to be marketed in recent months without a big cornerstone tranche.
In an all-primary share deal, the company is selling 531.9 million shares on the Hong Kong stock exchange at an indicative price range of HK$5.21 to HK$5.76 per share. The shares equate to 35% of the enlarged share capital and will give the company an implied market capitalisation of between $1.02 billion and $1.13 billion.
CRCC High-Tech, a subsidiary of China Railway Construction Corporation, will be the fifth Chinese central government-owned company to list in the fourth quarter in Hong Kong, following the likes of China Huarong Asset Management, China Reinsurance and CICC, which last month locked up billions of dollars during the course of their IPOs.
According to a term sheet seen by FinanceAsia, the company has secured $52.5 million in cornerstone investor commitments, accounting for between 13.2% and 14.7% of the deal depending on the final pricing.
CSR Zhuzhou Electric Locomotive Research Institute, a subsidiary of state-owned locomotive manufacturer CRRC Corporation, made the largest cornerstone investment of $30 million. The other two orders were from Jiantou Investment ($12.5 million) and Yunnan Energy Financial ($10 million).
In percentage terms CRCC High-Tech’s cornerstone tranche is much smaller compared with other Chinese SOE IPOs this quarter.
CICC sold 57% of its $811 million deal to cornerstone investors, while China Reinsurance and China Huarong sold 60% and 70%, respectively. Power construction contractor China Energy Engineering, which is due to price on Wednesday, could end up selling as much as 70% of its $1.96 billion IPO to cornerstone investors.
While sizable cornerstone tranches enable bookrunners to execute deals with relative ease, some market participants argue that the trend is unhealthy because they turn billion-dollar deals into semi-club deals dominated by large institutions. This is particularly true for IPOs with a heavy lineup of Chinese cornerstone investors or with heavy commitments from entities that have a close business relationship with the listing candidate.
So CRCC High-Tech could yet provide a better reflection of the current state of public demand for Chinese state-owned IPOs. It is scheduled to collect retail and institutional orders until December 8 and aims to list on December 16.
Business and valuation
CRCC High-Tech manufactures large machines that are used to construct or repair railway lines. Last year, the business accounted for slightly over 80% of the company’s revenue.
According to its preliminary prospectus, it was China’s biggest manufacturer of large railway track maintenance machines in terms of total sales with an 83.1% market share last year.
The company wants to use the majority of the IPO proceeds to construct a new research and development centre and to develop its sales network, according to the prospectus.
One source close to the deal told FinanceAsia that CRCC High-Tech is being marketed at 12.2 times to 13.5 times projected earnings next year.
That is a premium of at least 36.4% over the current valuation of its parent CRCC but is justified by the subsidiary’s accelerating net profit growth.
On a year-on-year basis, CRCC High-Tech’s net profit grew by 55.2% to Rmb436.5 million ($68.2 million) last year. Earnings growth continued to accelerate to 71.9% for the first six months of the year.
By comparison, CRCC’s profit growth slowed to 9.6% last year from 19.8% in 2013. By offloading its stake in the subsidiary, CRCC will be able to book a one-off gain that is roughly 20% of its net profit last year.
In its 2014 annual report, CRCC said the spin off of CRCC High Tech is intended to enhance the comprehensive competitiveness of the professional machinery manufacturing sector and promote the strategic improvement of the group.
The absence of listed track maintenance equipment manufacturing companies in China and Hong Kong means CRCC High-Tech will be able to offer infrastructure investors a new alternative in their portfolios. Its high-growth profile would likely stand out among other large infrastructure stocks, which generally grow at a stable but slower rate.
Yet from a wider market perspective, Chinese railway-related stocks have not outperformed the market despite the promising outlook brought about by the One Belt, One Road initiative.
For example, shares of CRRC Corporation have largely traded around the HK$10 mark in Hong Kong since July. Railway signal developer China Railway Signal & Communication, meanwhile, has lost 12.8% of its market value since listing in Hong Kong in September.