Hunan Nonferrous mines strong demand for IPO

Retail fremzy sees offer heavily oversubscribed despite 10% cap on institutional orders.
Hunan Nonferrous Metals has raised HK$1.77 billion ($227.5 million) from its Hong Kong IPO after fixing the price at the top of the deal's HK$1.20 to HK$1.65 indicative range. Retail investors committed at least HK$124 billion ($15.94 billion) to the offer. By contrast, Link REIT attracted HK$107 billion of retail interest for an IPO last November that was more than 10 times bigger than Hunan Nonferrous.

Observers say the strong demand was driven by the company's focus on a strategically important sector for the Chinese economy, as well as continuing momentum in the China IPO market.

Anticipating strong interest, joint bookrunners BOC International and Morgan Stanley capped institutional orders at one tenth of the total deal size including a 15% overallotment option. This meant no one order could be more than roughly $26 million.

Even so, sources say the combined orders from institutional investors amounted to more than $16 billion, leaving the 90% institutional tranche about 80 times covered pre-clawback. The tungsten producer company offered 1.07 billion new H shares, or 33% of issued share capital.

More than 400 accounts were said to have participated in the deal, with about 60% going to Asia and 20% each to Europe and the US.

Encouraged by the strong performance of recent new listings, retail investors also piled into the offer and their 107.6 million tranche was more than 700 times covered. That triggered an automatic increase of the retail portion of the deal from 10% to 50%.

Bankers say overwhelming retail demand for Chinese IPOs makes it hard to give meaningful allocations to institutional clients. It means institutions looking to build reasonable positions end up having to buy at a premium in the secondary market.

One observer concludes that the share price could exceed the 21% gain witnessed by China National Building Materials on its first day of trading last Thursday. He believes that retail investors may decide to wait a bit longer before they take profits this time around.

ôThe forward price-to-earnings valuation is about 30% lower than the valuation CNBM listed at," he notes. "Since then the share price has gone up another 30%, which makes Hunan Nonferrous look pretty cheap."

Hunan Nonferrous has been valued at 13.5 times its projected 2005 earnings and 10.1 times its forecast 2006 earnings. Other observers say this makes it look a bit pricey versus the largest Hong Kong-listed metals producers.

Aluminum Corp of China (Chalco) currently trades at a 2006 PE multiple of 9.1 times and Jiangxi Copper is quoted at 8.1 times. Shanghai-listed Xiamen Tungsten - one of the few pure tungsten - trades at a forward PE of about 18 times.

ChinaÆs dominates the tungsten business with 62% of global reserves and more than 80% of total production output. Some believe this makes it the metal's price-setter.

ôChina is doing a good job of managing its reserves and in the near term there's little competition from substitute products,ö the observer says. He adds that the management did a good job of communicating that story and its potential for future growth during the roadshow.

The company uses the tungsten it produces to make cemented carbide, or hard metals, which are then made into various products, including drilling and stone cutting tools for the mining and geological industries.

In the first nine months of last year, about 19% of its revenues were generated from the metal concentrates division, ie the mining of tungsten, antimony, lead and zinc. Smelted non-ferrous metal products accounted for 53% and value-added end-products, including cemented carbide and the tools produced from it, made up 28%.

Hunan Nonferrous is planning to use about 48% of the IPO proceeds to acquire additional mines and mining rights with the aim of becoming more self-sufficient, especially with regard to its lead and zinc operations.

The shares will start trading on Hong KongÆs main board on March 31.



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