A 920 million share IPO for China Resources Power (CRP) was priced at the very top of its indicative price range on Friday and like PICC before it, should make a similarly impressive debut on the Hong Kong Stock Exchange when it begins trading on Wednesday. Led by BOCI and Morgan Stanley, the offering was priced at HK$2.80 per share, representing a P/E ratio of 7.8 times 2005 earnings and 25% of issued share capital pre greenshoe.
Getting investors to accept a 2005 multiple was one of the key tests of the $330 million deal, since this is the first year the company will record "normalised" financials after a period of rapid build-out. Whether investors trusted the company's growth forecasts, or were simply chasing market momentum is hard to tell, but the oversubscription rates were undeniably strong.
Institutional books closed 21 times covered and retail books about 46 times covered. Because the latter closed just below the 50 times threshold, only the first clawback was triggered, meaning the deal has a better tilt towards long-term investors than some had feared. The final split sees institutions allocated 70% and retail 30%.
The institutional book had a split of 50% Asia, 30% US and 20% Europe, with about 40 investors placing orders for $30 million or more. About half of the institutional book were said to be new to the China power sector.
There was also said to be a very high hit rate from the one-on-one meetings, with a 90% acceptance rate from Europe and 80% from Asia and the US. Company supporters argue that this shows there is more to CRP's success than frothy markets and momentum players.
As one comments, "What was most pleasing was being able to satisfy even the most critical of investors and building a book of sector specialists. The company faced a pretty hard time on the road and investors asked a lot of questions. It was a fairly rigorous process to say the least."
Because the company hopes to treble capacity by 2005, investors face a significant degree of execution risk in the interim period and needed to make themselves comfortable with management. In order to do so, CRP also needed to come at a small discount to the weakest of the three main comparables - Huaneng Power International (HPI), Beijing Datang and Shandong International Power Development (SIPD).
Consensus estimates put HPI on 14.8 times 2005 earnings, Beijing Datang on 12.9 times and SIPD on 9.6 times.
From MW1,500 in installed capacity, CRP is planning to build out to MW4,500 by 2005 at which point debt to capitalization should peak around the 44% mark. While debt will be high relative to the rest of the China power sector, specialists argue the company runs its balance sheet along more commercial lines than its underleveraged state-owned peers and should consequently enjoy ROE levels a couple of percentage points higher than eve HPI.
It should certainly be pleased with its IPO result particularly as its three main comparables are all up about 85% so far this year.
Alongside the two leads, co-leads were CICC, CLSA, HSBC and ING.