Hongqiao tests market with accelerated IPO

The Chinese aluminium producer hopes to raise up to $2.2 billion from a Hong Kong IPO that is set to close before the Chinese New Year holiday.

With little more than a week to go before Chinese New Year, the Middle Kingdom’s most celebrated holiday, Chinese aluminium producer China Hongqiao Group is seeking investor attention to raise between HK$12.3 billion and HK$17.2 billion ($1.5 billion to $2.2 billion) from a Hong Kong initial public offering.

The launch of the deal so close to a major holiday took the market a bit by surprise as other issuers have chosen to hold off on their IPOs until after Chinese New Year. Hongqiao is instead planning to complete the deal on an accelerated timetable to get it done before the break.

The deal will also test investor confidence in China's aluminium industry, which is a big power consumer and has suffered declining profits due to the government's clampdown on industrial emissions and overcapacity last year.

Shandong-based Hongqiao, the fifth-largest aluminium producer in China, started a roadshow yesterday, offering 1.74 billion shares at a price of HK$7.10 to HK$9.90 apiece.

The price range translates into a price-to-earnings (P/E) ratio of 7.23 times to 10.08 times based on the projected earnings for 2011. 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.

All of the IPO shares are new and 90% of the deal, or 1.566 million shares, will be targeted at institutional investors. The remaining 10% will be earmarked for Hong Kong retail investors. The deal comes with a 15% greenshoe option which, if fully exercised, could increase the total deal size to as much as $2.6 billion.

The final price is expected to be fixed on January 31 and the trading debut is scheduled for February 11. Barclays Capital, BNP Paribas, Bocom International, ICBC International and J.P. Morgan are managing the deal.

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 preliminary IPO prospectus.

Its business relies heavily on demand for the light metal and the significant slowdown in aluminium consumption in China during the second half of 2008 made Hongqiao post a sharp decrease in profits.

The weak demand is unlikely to be repeated this year. In fact, analysts expect demand for molten aluminium alloy to pick up and Chalco’s earnings have indicated an upward trend. The country’s largest aluminium producer returned to profit last year after suffering losses in 2009. Luo Jianchuan, president of Chalco’s listed subsidiary, was quoted by Chinese media as saying that he thinks aluminium prices will increase this year.

Hongqiao is owned by Shandong Weiqiao Pioneering Group, a conglomerate whose businesses range from weaving, thermoelectricity and aluminium. It is also the parent group of Hong Kong-listed Weiqiao Textile, one of China’s largest cotton textile companies.
Meanwhile, Baofeng Modern International Holdings, one of the largest slipper makers in China, on Friday finished the bookbuilding for a Hong Kong IPO of up to HK$1 billion. Depending on the final price, the deal could be the first Hong Kong IPO to raise more than $100 million this year.

Baofeng is seeking to raise between HK$696.5 million and HK$1.04 billion by offering 350 million shares at HK$1.99 to HK$2.98. The offering consists of 250 million primary shares and 100 million secondary.

Baofeng intends to use 30% of the proceeds to expand capacity and 25% for marketing and advertising. The listing is scheduled for January 28. CMB International is managing the transaction.

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