Hidili to price $525 million IPO at the top

The sizable IPO attracts strong demand suggesting investors may not be as worried about lingering market volatility as bankers initially thought.
Recent placements and block trades for Hong Kong-listed companies may have required wide discounts to attract sufficient demand, but Hidili Industry International DevelopmentÆs initial public offering brings proof that investors have money to put to work. And, more importantly, that they are willing to take a bet on untested companies.

The privately-owned Chinese coking coal producer is the first company of size to complete a Hong Kong IPO since the secondary market started recovering from the August correction, and according to sources, it attracted strong demand from both institutional and retail investors.

This will be good news for the other nine companies that are currently in the Hong Kong market seeking to raise a combined $6 billion (this refers only to companies whose IPOs are greater than $100 million). Notably, a lack of price sensitivity in the Hidili deal suggests investors may not be quite as cautious about lingering market volatility and valuations as bankers believed a couple of weeks ago when they kicked off pre-marketing activities for the current wave of new listings. However, Hidili was offered at a sizeable discount to the other Hong Kong-listed coal companies.

The first signs of the positive investor response came a few days after Hidili started to accept orders from institutional accounts when the bookrunner lifted the top end of the price range by 2.7%. The low end was kept unchanged to account for the lingering volatility in the secondary market. One observer noted that resources companies typically have quite a wide price range to give the bookrunners more flexibility with regard to sudden swings in commodity prices that could have a significant impact on the share price of their sector peers.

Even with the slightly higher price range, demand was strong and the price is likely to be fixed at the top of the indicative range at HK$6.83 for a total deal size of HK$4.1 billion ($525 million), the sources say. Sole bookrunner UBS is due to announce the final price today.

Perhaps encouraged by the recent strength in the Hang Seng Index û it is up 22% since August 17 and closed at a new record high on Friday - and the widespread expectations of a continued re-rating of Mainland companies that are listed in Hong Kong, retail investors piled into HidiliÆs offering. According to one source, the retail tranche was about 670 times subscribed, which means it tied up approximately HK$274.6 billion ($35.2 billion) worth of cash and slid in just ahead of Mainland conglomerate Fosun International as the sixth most popular Hong Kong IPO among retail investors. The strong demand also triggered a full clawback, which increased the retail tranche to 50% of the total deal from the original 10%.

The institutional tranche was more than 150 times covered post clawback and was said to have attracted at least 400 investors.

The deal was also supported by four cornerstone investors who bought $80 million worth of shares split evenly between them. Based on the final price, this gave them 15.2% of the total deal or 4.6% of the company pre-greenshoe.

The cornerstones were Hong Kong property tycoons Lee Shau Kee and Joseph Lau, Bank of East Asia chairman David Li and the Malaysian Kuok family which controls the Kerry Group, Shangri-La Asia and the South China Morning Post. Each of them agreed to a six-month lock-up.

Hidili offered 600 million shares or 30% of its share capital at a price of HK$5.05 to HK$6.65 apiece. If the 15% greenshoe is exercised in full, the total proceeds will increase to as much as $603 million.

Of the total shares on offer, 83.3% were new. The rest were sold by Baring Private Equity and HidiliÆs 33-year-old founding chairman and CEO Xian Yang. Baring, which held 20% prior to the IPO that it obtained through the conversion of convertible bonds earlier this year, will see its stake fall to 11% pre-greenshoe. The chairmanÆs stake will drop from 80% to 59%.

The final price values the coal producer at just above 15 times its projected 2008 earnings, which equates to a discount of 38% and 43% versus larger players China Coal and China Shenhua Energy. The discount widened during the roadshow as China Coal and Shenhua Energy gained 10% and 20% respectively, partly in response to a pick-up in demand for H-shares in general on a belief that they will be the key beneficiaries when Chinese nationals will be allowed to start investing in Hong Kong-listed stocks.

However, Shenhua Energy has also been bid up because it is in the process of listing in Shanghai û a move that the market believes will have a positive impact on its H-shares because of the higher valuation in the A-share market. Shenhua is looking to raise as much as Rmb67 billion ($8.9 billion) in what could be the largest A-share IPO to date. The China Securities Regulatory Commission (CSRC) has said it will review the listing plan today.

China Coal and Shenhua Energy currently trade at 24.2 times and 26.4 times next yearÆs earnings, compared with about 22 times for both of them at the start of HidiliÆs roadshow. Smaller player Yanzhou Coal, which has traded largely sideways over the past couple of weeks, is quoted at a 2008 earnings multiple of about 18.5.

Hidili differs from the other three as it will be the first Hong Kong-listed coal producer to focus solely on coking coal, which because of its higher heat content, makes it ideal for the iron and steel industries. China Coal, Shenhua Energy and Yanzhou Coal primarily produce thermal coal that is used by power generators.

The prices for the two different coals have been on a similar upward trend in China with a more than 18% increase in the first half of this year, but the price for coking coal is about 50% higher than for thermal coal. And given that both types face similar overhead costs for mining and extraction and transportation, coking coal also has higher profit margins, according to a sector analyst.

Hidili currently has 14 operational mines in the Sichuan province and acquired five new mines in the Guizhou province in the first quarter this year that will begin production in the second half. Including these new mines and capacity expansion at its existing operations, the company is expected to increase its raw coal output by 31% to 2.9 million tonnes in 2007 and to 3.7 million tonnes in 2008, according to a syndicate research report.

Among the companyÆs key selling points were the high quality of its coal reserves and the fact that its new mines in Guizhou are close to its major customers in Southwestern China and have better transport connections û through established railways - to the steel plants in the Hunan, Guangdong and Guangxi provinces than the many coal mines in the Northern Shanxi province. This means Hidili has a cost advantage over several of its competitors in the north which face bottlenecks in railway or shipping capacity, observers note.

Hidili will start trading on Hong KongÆs main board on September 21.
¬ Haymarket Media Limited. All rights reserved.

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