Hongqiao Group, a leading Chinese aluminium producer which planned to raise up to $2.2 billion in an accelerated Hong Kong IPO, scrapped the deal yesterday, citing weak market conditions and falling prices of the light metal in global markets.
The IPO looked challenging from the beginning. The company kicked off its offering just over a week before the Chinese New Year holidays (which start on Thursday this week) when market sentiment is routinely weak. And, indeed, during the one-week roadshow, major stock indices worldwide dropped and aluminium spot prices declined.
The cancellation of the deal, which was to have become the first sizable IPO in Hong Kong this year, is likely to cast a shadow on upcoming share offerings.
China's fifth-largest aluminium producer launched the institutional bookbuilding last Monday but announced by the middle of last week that it had decided to delay the retail offering by one day, keeping it open until noon on February 1. However, it still intended to list on the Hong Kong stock exchange on February 11 as scheduled. It didn't give any reason for the delay.
But last night Hongqiao decided to call off the deal altogether. “In light of the deterioration in market conditions since publication of the prospectus,…the company has formed the view that it would be inadvisable to proceed with the global offering,” it said in a statement posted on the Hong Kong stock exchange website. The company had initially been due to fix the IPO price yesterday.
Hong Kong's Hang Seng Index has declined by 1.5% since Hongqiao's roadshow started and, in the US, the S&P500 and the Dow Jones Industrial Average have both dropped more than 1% during the same time. Prices of spot aluminium on the LME (London Metal Exchange) and stocks with high correlation to the metal also fluctuated heavily last week.
Hongqiao, which is based in Shandong province in northeastern China, offered 1.74 billion new shares at a price of HK$7.10 to HK$9.90 apiece. The price range translated into a price-to-earnings (P/E) ratio of 7.23 times to 10.08 times based on the projected earnings for 2011. That valuation pitched the company at a significant discount to its close competitor Aluminum Corp of China, known as Chalco, which trades at a 2011 P/E ratio of 22.4 times.
About 90% of the offering was targeted at institutional investors, while the remaining 10% was earmarked for Hong Kong retail investors. The deal had a 15% greenshoe option, which, if fully exercised, could have increased the total deal size to as much as $2.6 billion.
J.P. Morgan was the sole global coordinator and joint bookrunner together with Barclays Capital, BNP Paribas, Bocom International and ICBC International.
The company planned to use the proceeds from the offering to increase its production capacity. Chinese aluminium producers have been struggling to stay afloat over the past two years. Their businesses have suffered declining profits due to the government's clampdown on industrial emissions and overcapacity.
Chalco's profit finally turned positive last year after suffering several quarters of losses. Yet, the company is still thirsty for capital. The company, which is listed in both Hong Kong and Shanghai, said yesterday it plans to raise up to Rmb9 billion ($1.4 billion) through a sale of as many as 1 billion Shanghai-listed A-shares.
The company will sell the shares to no more than 10 firms, including funds, securities companies, insurers, trust companies, finance companies and qualified foreign institutional investors, it said in a statement to the Hong Kong stock exchange.