High demand for first A-share deal led by UBS

Metals producer Western Mining is set to price its $815 million offering at the top after investors order 242 times the shares available.
Western Mining looks set to raise the maximum amount from its Shanghai listing after attracting a massive Rmb1.5 trillion ($197.5 billion) in demand, according to a source familiar with the initial public offering.

The IPO is the first A-share deal to be arranged by UBS and only the second one to be bookrun by an international investment bank following Goldman SachsÆ lead role on PingAn InsuranceÆs $5 billion IPO earlier this year. UBS received authorisation to underwrite Chinese equity offerings in February when its investment in Beijing Securities was finalised. It has been working on Western MiningÆs IPO since early April.

The mining firm, which produces zinc, nickel, copper and aluminium, closed the two-day bookbuilding for its A-share IPO yesterday and is due to fix the price today. However, with the deal being 242 times covered, there is little doubt that it will end up at the top of the Rmb12 to Rmb13.48 price range for a total deal size of Rmb6.2 billion ($815 million).

The oversubscription ratio meant the deal tied up more money than the much larger IPOs for Bank of China, Bank of Communications, China Life Insurance and Ping An Insurance. In fact, only China Cosco has been more popular. The container line operator, which is already listed in Hong Kong, attracted Rmb1.63 trillion ($214 billion) worth of orders for its $1.98 billion A-share offering last month û the fourth largest Shanghai listing so far this year.

Observers say the overwhelming interest for Western Mining is partly due to the expectation that ChinaÆs demand for metals will remain robust, but also to the strong gains in the secondary market for other recent listings. China Cosco, which started trading on June 26, more than doubled in intraday trading and finished its first day 93% above the IPO price.

Bank of Communications closed up 71% on its A-share trading debut in mid-May after attracting Rmb1.46 trillion ($192 million) of demand for its $3.26 billion share offer. The Shanghai market in general has also had a strong run this year, even though it has become a bit more volatile over the past month. In the first six months, the Shanghai Composite Index gained 43%, making it the second best performer in Asia after the more volatile Shenzhen benchmark, which was up 96%.

The fact that Western MiningÆs IPO was offered at a significant discount to its A-share peers suggests it too is likely to trade up when it comes to market on July 16. The price range values the company at 18.6 to 20.9 times its 2007 earnings which, at the top end, translates into a 34% discount to the average valuation of other Shanghai-listed miners.

However, Mainland miners tend to trade at 1.3-1.5 times the valuation of their international comps, meaning the deal doesnÆt look quite as generous when placed in an international context. One observer notes that if Western Mining had listed in Hong Kong it would have been lucky to get away with a P/E multiple of 10 to 11 times.

According to people who have read UBSÆ research on Western Mining, the investment bank has a very positive view on the company and argues that the fact that it owns a copper mine that has yet to start commercial operations suggests there is a lot of growth potential. However, international metal prices have been coming down over the past couple of months, suggesting a more uncertain outlook for the sector.

A source says the decline in metal prices was part of the reason why the IPO price range was set at such a wide discount to its Mainland-listed peers.

Western Mining offered 19.3% of the company or 460 million new shares in total, of which 115 million were sold to qualified institutional buyers through a so-called ôofflineö placement. That sale, which opened Monday and closed yesterday, attracted more than 350 accounts and enough demand to cover the entire deal, sources say.

The other 75% of the deal was sold yesterday through an ôonlineö offering to the public. That portion was open to everyone, including institutional investors, and accounted for about Rmb1.25 trillion of the total demand.

Faced with such numbers it is difficult not to brand UBSÆ first effort in the A-share market as a successful one, although the final test will obviously come when the shares start trading. However, the Swiss bank has clearly shown that it intends to be a force to be reckoned with in ChinaÆs domestic market as well and even before completing this first deal, the bank has been lining up the mandates.

According to market sources, the bank is believed to be working on more than 10 A-share deals, some of which include combined A- and H-share offerings, and may bring another four or five to market before the end of this year. Among its known mandates are PetroChinaÆs recently announced A-share offering, which could raise as much as $6 billion and become ChinaÆs largest equity sale this year, a dual A- and H-share IPO for China Pacific Insurance and an A-share IPO for Beijing Capital International Airport.

Sources say the fact that UBS runs its China business from one platform, meaning the same team is pitching for and arranging the deals irrespective of whether they are H- or A-share offers, has helped it win mandates - particularly from companies looking for a dual listing.

Goldman Sachs Gao Hua Securities, which was one of the bookrunners for Ping AnÆs A-share IPO alongside local firms China Galaxy Securities and Citic Securities, is known to be working on an A-share IPO for Ningbo Commercial Bank, which could raise $350 million to $500 million. It is also the financial adviser for China MobileÆs planned A-share offering, which may raise as much as $10 billion.
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