Kunming Dianchi Water Treatment prices IPO at bottom

Investment only trickles in for deal at a time when industry transformation in China poses execution risks.

Yunnan's largest wastewater treatment and reclaimed water supplier, Kunming Dianchi, priced its initial public offering at the bottom of the range on Thursday, raising HK$1.3 billion ($171 million) pre-greenshoe.

Pricing at HK$3.91 was no great surprise given market conditions have softened since book building began and the company has yet to prove it can transition to the new public private partnership (PPP) model the Chinese government wants future industry projects to be run on.

Observers said the retail and institutional order book both closed covered, with retail allocated 10% and institutions 90% of the 339.4 million share deal (pre greenshoe).

The latter order book comprised the usual mix of friends and family investors incorporating Chinese corporates, high-net-worth investors and some institutions. 

Excluding cornerstones and the Hong Kong retail tranche, the top 10 investors took 80% of the remaining deal.

In total, 56% of the base deal, or $96 million, went to four cornerstones: Yunnan Provincial Investment Holdings on $33 million; Kunming IDI on $30 million, Beijing Water Enterprise on $23 million and China Water Environment $10 million.

The IPO price values Kunming Dianchi at 10.9 times forecast 2017 earnings and will give it a pre-shoe market capitalisation of $518 million.

Over the past four trading days, both of the company’s nearest comparables have underperformed the overall market and come under selling pressure.

The country’s biggest wastewater treatment company and fellow SOE, Beijing Enterprises Water, has slipped 2.23% over the past four trading days to close Thursday at HK$5.7.

This values it at 13.67 times consensus 2017 earnings and means that Kunming Dianchi has come at a 20.22% discount.

However, the latter has come at a 25.2% premium to a second comparable, Kangda International Environmental. The Hong Kong-listed private sector operator has seen its share price fall 6.58% over the past four trading days, to close Thursday at HK$1.99.

At this level it is valued at 8.7 times consensus 2017 forecast earnings.

By contrast, the Hang Seng Enterprises Index has come off 1.2% since the end of last week.

One advantage Kunming Dianchi has is its dividend yield and bankers said this was one of the main draws. The stock has been priced at a 4.6% yield compared to Beijing Enterprises Water’s 2.09% and Kangda International’s 0.95%.

One key risk is its current lack of experience handling PPP projects. Most of the company’s portfolio comprise projects are based on a transfer-own-operate (TOO) model, accounting for 77% of revenues in 2017.

It has 34 plants in total, of which 29 are in operation, two under construction and three under development, of which two are in neighbouring Laos.

Proceeds from the IPO are split: 35% to finance build-operate-transfer (BOT) projects and build-own-operate projects (BOO), 35% to expand by purchasing TOO projects, 20% to repay bank borrowings and 10% to fund working capital.  

Listing is scheduled for April 6. Pre-greenshoe, the company has offered 33% of its enlarged share capital.  

Morgan Stanley was sole sponsor for the IPO with other bookrunners comprising CICCHaitong InternationalZhongtai International, Huatai Financial, GF CCBI, BOCICMB International, Guotai Junan and Everbright Securities.

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