CSR completes Hong KongÆs third largest IPO this year

The book for China South Locomotive's offering is 10 times covered, allowing it to raise $533 million.
Both institutional and retail investors came out in force to help train maker China South Locomotive & Rolling Stock (CSR) raise HK$4.16 billion ($533 million) before its Hong Kong trading debut next Thursday. The size of the deal bumps casino operator, SJM Holdings, from the number three spot for the largest Hong Kong IPO so far this year. But it is still some way behind snack producer China Want Want which raised $1.04 billion in March.

CSRÆs shares were priced at HK$2.60, close to the middle of the HK$2.49 to HK$2.76 range. The 1.6 billion shares on offer amount to 13.8% of the company. There is a 15% greenshoe, which if exercised, could increase the final deal size to $613 million.

Alongside the H-shares, the company has also issued 3 billion A-shares, which account for 25% of the company. These priced last week at Rmb2.18 a share, the top of the indicated range, raising Rmb6.54 billion. The A-shares are expected to debut on Monday.

A source says that the pricing was helped by several major investors raising their offers as the bookbuilding gained momentum. Another source says that the deal could have been priced at the top of the range, but with the A-share market down by 13% in the offering period for the H-shares, it was priced lower to ensure a strong listing.

There were 200 accounts on the institutional tranche, and the book was covered 10 times over. The investors were described as being ôall the usual suspectsö and included both long-only funds and hedge funds, corporate accounts, as well as some private wealth accounts. Although most of the demand came from Asia, there was also some strong interest from the US and the UK. The retail book was also well covered, but at 13 times, it was not large enough to trigger a clawback.

The share price values the company at 18.5 times expected earnings in 2008 and 13.8 times expected earnings in 2009. This puts the company at a substantial discount to the comps û infrastructure companies China Construction Railway Corp (CCRC) and China Railway Group, which are both trading at 25 and 30 times respectively.

Investors were drawn to the company due to the Chinese governmentÆs plans to invest on average more than Rmb100 billion ($15 billion) each year in railway infrastructure up until 2020. While CSRÆs competitors focus on making tracks, CSR has a 50% market share of the rolling stock that runs along them. It also exports locomotives to over 30 countries.

Asked whether the success of this deal would encourage other Hong Kong IPOs to come to market, one source said it would help, but only in certain cases. ôThe market will remain pretty selective. I would only expect companies with sensible pricing expectations to come to market.ö

CICC and Macquarie were joint bookrunners on the deal.
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