Hongqiao returns with downsized IPO

Chinese aluminium producer Hongqiao revives its planned IPO, but trims the deal size by more than half.

China Hongqiao Group, the country’s leading aluminium producer, has returned to the market after scrapping its planned $2.2 billion IPO in January. More cautious this time, the company is looking to raise less than half that much; just HK$7.34 billion ($943 million).

Hongqiao’s original deal would have been the first sizeable IPO in Hong Kong this year. The company first took its story to investors more than a week before Chinese New Year, hoping to pocket between HK$12.3 billion and HK$17.2 billion ($1.5 billion to $2.2 billion) in an accelerated deal before the holiday.

However, on the day the offering price was expected to be fixed, the company decided to delay the deal, citing weak market conditions and falling global prices of aluminium.

The market has shown little sign of improving since late January, and Japan’s earthquake and tsunami have not improved conditions. Hongqiao kicked off the bookbuilding on Monday by offering 885 million new shares at HK$7.20 to HK$8.30 apiece. The price range is lower than the HK$7.10 to HK$9.90 band it originally planned and the company has trimmed the number of shares from 1.74 billion.

The downscaled price range translates into a price-to-earnings (P/E) ratio of 6.5 times to 7.5 times, after the greenshoe, based on Hongqiao’s 2011 forecast earnings. By comparison, Hongqiao’s close competitor Aluminum Corp of China, known as Chalco, trades at a 2011 P/E ratio of 22.4 times, according to Bloomberg data.

The price range also suggests the company could raise between HK$6.37 billion and HK$7.34 billion. The deal comes with a 15% greenshoe option that, if fully exercised, could increase the total deal size to as much as HK$8.4 billion.

Some 90%, or 796.5 million shares, have been prepared for international investors and the remaining 10%, or 88.5 million, have been earmarked for the Hong Kong public offering.

The shares will be priced on March 18 and a trading debut is scheduled for March 24. J.P. Morgan is the sole global coordinator and sole sponsor of the deal, the US bank is jointly managing the sale with Barclays Capital, BoCom International, BNP Paribas, ICBC International and Mizuho.

Hongqiao has secured $350 million from four cornerstone investors. Developers Cheung Kong and Chow Tai Fook, which is controlled by Hong Kong tycoon Cheng Yu-tung, each agreed to buy $100 million worth of shares. 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.

Hongqiao produces molten aluminium alloys. As at the end of September 2010 it had an aggregate designed annual production capacity of 916,000 tonnes of aluminium products. The company plans to use the proceeds from the offering to increase its capacity and to double its turnover by 2010, according to its IPO prospectus.

Many IPOs are in the market and competing for investor attention at the moment, despite the uncertain conditions in recent weeks. Other deals include Hilong Holding, a Chinese oilfield equipment and services provider, which is looking to raise $190 million from a Hong Kong IPO. The deal has received a $10 million cornerstone commitment from Larry Yung, the former chairman of Citic Pacific.

Top Spring International Holdings, a Chinese property developer, is seeking $257 million from the city’s IPO market. The offering received strong market demand and the books were fully covered on the first day of roadshow.

¬ Haymarket Media Limited. All rights reserved.
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