IMM mines the Hong Kong IPO market for up to $427 million

The Chinese coal mining equipment maker will use the money to fund potential acquisitions and other investments to enhance its production capacity.

International Mining Machinery (IMM), a Chinese coal mining equipment producer, started bookbuilding yesterday to raise up to HK$3.32 billion ($427 million) in an initial public offering (IPO) in Hong Kong.

The company is offering 520 million primary shares, or 40% of the enlarged share capital, in a price range of HK$4.88 to HK$6.38 per share, which will allow it to raise between HK$2.54 billion and HK$3.32 billion. 

The price range represents a price-to-earnings ratio of between 18 and 23.5 times projected earnings for 2010. By contrast, the Hong Kong-listed shares in Sany Heavy Equipment -- IMM's key domestic competitor -- are trading at 30 times.

IMM and Sany are the leading providers of coal mining equipment in China, with each having a 27% share of the nationwide market. The two companies have many similarities, sources said, but the former has a more diversified product portfolio. IMM also has 50 major customers that are all big state-owned enterprises, while Sany has over 300 customers of varying sizes. 

Coal prices, the performance of coal miners and raw material prices are of vital importance to IMM's profitability, the company said in a preliminary prospectus. China Everbright Research predicts coal prices in China, the world's largest consumer of the fuel, may increase by 10% in 2010. "That will be good news for coal mining equipment makers," said Nikita Zhang, an analyst at the firm.

As usual, 90% of IMM's new shares are offered to institutional investors, while 10% have been earmarked for Hong Kong retail investors.

The offering size will stretch to 598 million shares, or up to $492 million, if a 15% greenshoe option is fully exercised. Despite the decent size of the deal, the company has enlisted no cornerstone investors to support the IPO.

The deal, which is arranged by BOC International and UBS, will be priced on February 3 and the trading debut is scheduled for February 10. The institutional bookbuilding will remain open until the pricing date, while the public offering in Hong Kong will run between January 29 and February 3.

Demand was good on the first day, with a good mix of investors having placed orders, people familiar with the deal said.

IMM will use 21% of the net proceeds to repurchase preference shares issued to one of its controlling shareholders in 2006 and 2007 in connection with an acquisition, and 16.5% to pay dividends to pre-IPO shareholders. It will also earmark approximately 30.8% for potential acquisitions and other investments to enhance its production capacity, according to a term sheet. Another 21.8% of the money raised will be used to upgrade production facilities, while the remainder will go towards general working capital.

The company's revenue increased 24.3% to Rmb873 million ($128 million) in the seven months to July 31 last year, from Rmb702.6 million in the same period a year earlier. Net profits surged 45.8% to Rmb138.4 million from Rmb94.9 million during the same period, according to the prospectus.

And if Sany Heavy Equipment is any guidance, then IMM's share price could be in for a strong performance too. Sany, the largest manufacturer of roadheaders for coal mining in China, raised $309 million in a Hong Kong IPO in November after selling 500 million primary shares at HK$4.80 apiece. The stock jumped 27% in its trading debut and has been trading at an average price of HK$8.70 in the past two months. Yesterday it closed at HK$8.68, which represents an 80% gain from its IPO price.

Market watchers say IMM beats Sany in terms of product range, because it aligns itself with the consolidation of coal mines in China which is creating a need for individual equipment suppliers to meet a wide range of equipment demands.

Currently, the coal mining equipment industry in China is fragmented. The industry is divided by equipment type, and many large-scale domestic manufacturers only command a leading position in certain types of equipment or product segments. Sany specialises in roadheaders, for example, which are a form of excavating equipment used to make tunnels.

But the restructuring of the coal mining industry also poses a threat to equipment makers. Early last year, the government of Shanxi, which is the largest coal mining base in China, ordered the number of mine shafts in the province to be gradually reduced from over 2,000 to below 1,000 by 2015.

"Smaller coal mines are closing under the government's order, which will reduce demand for mining devices," China Everbright's Zhang said.

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