Hongqiao IPO raises $822 million at second attempt

Hongqiao raises less than half it originally planned to, but bankers are relieved as the Chinese aluminium producer successfully launches in a choppy market.

China Hongqiao Group, the country’s leading aluminium producer, raised HK$6.37 billion ($822 million) on Friday in the largest Hong Kong IPO by a metal and mining player during the past year.

It priced the shares at HK$7.20, the bottom end of an indicated range that went up to HK$8.30. Although the company pocketed less than half of the $2.2 billion it originally looked for, bankers are pleased the deal managed to make it through the choppy market. Given the current tough market conditions, “our key satisfaction is getting the deal done”, said one banker. “It’s nice to see that investors have the courage and conviction, and that the company management can convince the investors so strongly.”

Earthquake-stricken markets have put investors on edge and some issuers have chosen to hold off on planned initial public offerings. Australia-listed Galaxy Resources, a lithium miner, postponed its $200 million listing in Hong Kong and said in a statement early last week that it was a prudent decision in light of serious international events and the related market volatility.

Later, on Thursday, Hilong Holding, a leading provider of oilfield equipment and services in China, postponed its planned $190 million Hong Kong IPO, blaming the weak market conditions.

Hongqiao’s offering attracted a good mix of investors from Asia, Europe and the US, and the books were covered on the first day of the roadshow.

The company decided to fix the price at the bottom end of guidance, at HK$7.20, to help the deal’s performance in an uncertain secondary market — the one-week gap between the day of pricing and the stock’s trading debut, which falls on March 24, makes it difficult to predict where the market is heading, so Hongqiao and its bankers played safe by pricing conservatively.

Based on the company’s 2011 forecast earnings, the final price translates into a price-to-earnings ratio of 6.4 times.

Hongqiao sold 885 million new shares in total, with 90% going to international investors and the remaining 10% earmarked for the Hong Kong public offering.

The company won $350 million in cornerstone commitments from four investors. Developers Cheung Kong and Chow Tai Fook, which is controlled by Hong Kong tycoon Cheng Yu-tung, each agreed to invest $100 million. Thomas Lau, managing director of shopping mall operator Lifestyle International Holdings, and his brother, Joseph Lau, chairman of Chinese Estates, each agreed to buy $75 million worth of shares.

Based in northeast China’s Shandong province, Hongqiao enjoys a bigger profit margin than its industrial peers by charging customers a premium for its value-added products. The company produces molten aluminium alloys, so when the products reach clients, they don’t have to spend time and money to re-melt the alloys, though that part of the business was a bit difficult for investors to understand, according to bankers.

Hongqiao runs its own power plant, which provides 60% of the company’s power needs and also helps it reduce production costs, according to the company.

It first came to market in January, looking to raise between HK$12.3 billion and HK$17.2 billion ($1.5 billion to $2.2 billion) in an accelerated deal before the Chinese New Year holiday. That deal would have been Hong Kong’s first sizeable IPO of the year, but Hongqiao later decided to delay the deal, citing volatile market conditions at the time.

Barclays Capital, BoCom International, BNP Paribas, ICBC International, J.P. Morgan and Mizuho managed last week’s deal.

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