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IMM prices IPO at the bottom and downsizes institutional tranche

The $327 million deal offers more evidence that demand for Hong Kong IPOs is waning. Earlier in the week, Chu Kong Pipe also priced at the bottom, while Sijia pulled its offering citing current market conditions.

International Mining Machinery (IMM), a Chinese mining equipment producer, late last week priced its Hong Kong initial public offering at the bottom of the indicated range for a total deal size of HK$2.54 billion ($327 million).

This was the latest sign that investor appetite for new deals is waning as global stockmarkets come under increasing pressure, and further evidence that the world's number one IPO market in 2009 is losing its vigour.

A day earlier, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' IPO was also priced at the bottom, capping the deal size at HK$1.35 billion ($174 million), and on Tuesday last week, Sijia Group pulled its IPO, citing "the current market conditions for initial public offerings". The company, which makes high-strength composite materials made from polyester and inflatable and waterproof products, including waders, protective garments and inflatable boats, was aiming to raise up to HK$826 million ($107 million) with the help of sole bookrunner and sponsor Piper Jaffray.

IMM's tepidly received share sale, which started bookbuilding late last month, is sending a message to the market that "companies will need to either postpone their IPOs to the following months (after February) or offer cheaper valuation to avoid disappointing results," said Kingston Lin, a business development director at OSK Securities. "IMM has set the price at the bottom but that doesn't guarantee that the share price will not drop below the IPO level (when it starts trading)," he said. "The stock is likely to hover about 5% around the IPO price on the first trading day."

The Beijing-based company sold 520 million primary shares, or 40% of its enlarged share capital, at a final price of HK$4.88, after offering the shares in a range between HK$4.88 and HK$6.38 apiece.

The institutional tranche was downsized from 90% of the total offering to 83%, which in turn increased the retail tranche to 17% from 10%. While there was no confirmation that the institutional tranche was not fully covered, the re-allocation suggests that the quality and depth of the institutional book was not that great. Before the re-allocation, the retail tranche was just under 14 times covered.

Investors are concerned about how the stock will ride the volatile market, sources familiar with the deal said. The shares were allocated to a mix of Asian and US-based investors, and the deal was "fully allocated", according to one source. However, because of the shifting of shares from the institutional tranche to the retail tranche, the stock exchange wouldn't let the company also allocate the greenshoe. As a result, IMM won't be able to raise any additional proceeds even if the secondary market improves and, more importantly, the bookrunners won't have any shares available to support the stock when it starts trading.

The Hong Kong stockmarket tumbled a combined 5.1% on Thursday and Friday last week, but during IMM's roadshow, which lasted from January 25 to the end of trading on Wednesday last week, the Hang Seng Index lost just four points.

Given the recent weak demand for new shares, "it will be difficult for the Hong Kong bourse to meet its fundraising ambitions for 2010", said Francis Cheung, head of China and Hong Kong strategy at CLSA.

PricewaterhouseCoopers had earlier predicted that the total funds raised through new IPOs in Hong Kong may exceed HK$300 billion in 2010. These expectations follow HK$243.7 billion worth of new Hong Kong listings last year, which made Hong Kong the most active IPO market in the world.

However, Hong Kong's stockmarket has had a bearish tone since the beginning of 2010 amid fears of monetary tightening by Beijing and concern about the global recovery. The Hang Seng Index has dropped 9.3% this year.

IMM's final price of HK$4.88 represents a price-to-earnings ratio of 18 times, based on projected earnings for 2010. This is a significant discount to its domestic competitor Sany Heavy Equipment, which is also listed in Hong Kong and currently trades at a 2010 P/E of 28.7 times.

Sany, the largest manufacturer of roadheaders for coal mining in China, raised $309 million in a Hong Kong IPO in November after pricing the deal at the top of the range. The shares then jumped 46% in their trading debut and, as of last Friday, had gained 70%. The deal was arranged by HSBC and Standard Chartered.

According to some observers, IMM has an advantage over Sany in terms of its customer base. IMM has 50 major customers that are all big state-owned enterprises, while Sany has over 300 customers of varying sizes, including smaller-scale mining companies which are facing the pressure of closure amid the government's desire to see the industry consolidate.

IMM will use the funds raised through the IPO to repurchase preference shares previously issued to one of its controlling shareholders, to pay dividends to pre-IPO shareholders, to finance acquisitions, and to improve and expand its production and service network.

Last week, China First Heavy Industries, the country's largest maker of heavy machinery in terms of output, which has a similar business model to IMM, failed to raise the maximum amount sought in a Shanghai IPO by pricing its $1.67 billion deal below the top end of the indicated range -- a rarity in mainland public offerings.

Another heavy machinery producer, China Erzhong Heavy Industries, fell 4.1% below its A-share IPO price of Rmb8.50 when it started trading last Tuesday. However, by last Friday, the share price had advanced to Rmb8.89.

Chu Kong Pipe faced a sharp decline in its closest comparable, Shengli Oil & Gas Holdings, during its roadshow, which kept many investors away and made the guys who did participate very sensitive about price. The deal attracted about 40 institutional investors, including both specialist Hong Kong and China funds, and global emerging markets funds, while the retail tranche was said to have been more than five times covered. Further details about the level of demand weren't available.

The price was fixed at the bottom of the HK$4.50 to HK$6.15 range, which translated into a 2010 price-to-earnings ratio of 7.9 times. By comparison, Shengli was quoted at about 9.4 times this year's earnings after falling 18.9% during Chu Kong Pipe's roadshow that ran from January 25 to February 2. The deal was arranged by Industrial and Commercial Bank of China and J.P. Morgan.

Chu Kong Pipe and IMM are both scheduled to start trading on Wednesday, February 10.

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