Metallurgical Corp of China seeks $2.5 billion from H-share IPO

MCC, the world's largest metallurgical engineering and construction firm, kicks off this year's largest Hong Kong IPO, while three more companies start pre-marketing.

Metallurgical Corporation of China (MCC) yesterday launched the formal roadshow for the H-share portion of an initial public offering that aims to raise a combined $5.3 billion and will result in a listing in both Hong Kong and Shanghai later this month. The company will start taking orders for the A-share portion today.

MCC is seeking up to HK$19.6 billion ($2.5 billion) from the H-share portion alone, which will make it the largest Hong Kong IPO since China Railway Construction Corp's $2.55 billion initial share sale in March 2008. If it prices towards the top end of the range and the greenshoe is exercised in full, it could even exceed CRCC's offering and raise as much as $2.9 billion, making it the largest Hong Kong listing since China Citic bank raised HK$28.7 billion ($3.7 billion) from the H-share portion of its $5.4 billion dual listing in April 2007.

The large size also makes MCC stand out among the multitude of listing hopefuls that are currently in the Hong Kong market. A total of nine issuers are now seeking to list within the next three weeks, including three companies that started pre-marketing yesterday. In addition to MCC, menswear designer and manufacturer China Lilang also kicked off its institutional roadshow yesterday with the aim of raising up to $155 million (see separate story on our website today), while Sinopharm, a distributor of pharmaceutical products started taking orders for an offering of up to $1.13 billion on Friday last week.

So far, MCC appears to be doing okay in terms of getting investors' attention. According to a source, five names have already committed to participate in the deal as cornerstones investors and will buy a combined $250 million worth of shares. In exchange for their guaranteed allocations, the cornerstones will be locked up for six months. The five investors, who will each invest $50 million, are China Overseas Finance Investment, CCB International Asset Management, China Road Engineering and Investment Co, Bank of China Group Investment, and Citic Pacific.

At first glance, MCC looks a bit expensive compared with two of the main comparables that investors are benchmarking against -- China Railway Group and China Communication and Construction Corp -- but sources say this is not unreasonable given that MCC has a much more diversified business with four core areas: engineering and construction (E&C), resources development, equipment manufacturing and property development. Because of a requirement that stipulates that the H-shares must be priced higher than the A-shares, the bookrunners for the H-share offering also have their hands somewhat tied in terms of where they can set the price range, and this may lead to a slightly higher valuation than would have been the case had they been free to set the price range at the level they thought appropriate.

According to sources, the H-shares will be offered at a price between HK$6.16 and HK$6.81 per share, which translates into 16.4 to 18.1 times the projected 2010 earnings, based on consensus bookrunner forecasts. By comparison, CCG closed yesterday at a 2010 price-to-earnings ratio of 16.3 times, according to Bloomberg, while CCCC was quoted at 13 times its projected 2010 earnings.

There was no official announcement of an A-share price range, but various international media reported that the range had been set at Rmb5.00 to Rmb5.42. That would mean that the bottom of the H-share range is virtually equal to the top of the A-share range, after taking into account the exchange rate. This structure has been applied on previous dual listing as well and has been proven to work quite well. For one, the bookrunners will be able to use the entire H-share range even if the A-share price is fixed at the top. The final H-share price will be fixed after the A-share price is determined, but before the A-shares start trading to avoid the impact of a potential rally in the A-shares on day one.

MCC is offering 2.87 billion H-shares, which is slightly more than the 2.6 billion H-shares that it flagged in a document outlining the A-share offering last week and means that the H-share tranche will account for 15% of the issued share capital, or 16.9% if the 15% greenshoe is exercised in full. As indicated earlier, the H-share tranche will make up 45% of the total deal size.

The company has earlier said that it intends to sell up to 3.5 billion A-shares, which implies a total deal size of Rmb17.5 billion to Rmb18.97 billion ($2.6 billion to $2.8 billion).

MCC has been granted a waiver that will allow it to set aside only 5% of the H-share tranche for retail investors initially and to keep the maximum retail allocation, after a potential clawback, at 20%.

The H-share portion is arranged by China International Capital Corp, Citi, Citic Securities and Morgan Stanley, while Citic Securities is leading the A-share offering.

Engineering and construction is MCC's largest business area, making up more than 80% of revenues and profits. The company is particularly strong within metallurgical E&C, which refers primarily to the design and construction of large-scale steel mills, where it ranks as the largest contractor in the world. This segment makes up just over 55% of its revenues and with an operating history dating back to the 1940s, one syndicate research report estimates that the company has participated in more than 90% of the steel mill construction work in China.

As of June 30, the backlog of E&C business amounted to Rmb180.2 billion. At the same time, the aggregate value of new contracts entered into in the first half of 2009 was Rmb79.7 billion, compared with Rmb172.3 billion worth of new contracts in 2008.

However, sources suggest that while metallurgical E&C will continue to bring in sizeable revenues, it is other parts of the business, including non-metallurgical construction that will be the key growth drivers in the years ahead, as the steel industry battles with overcapacity and a lack of new-built demand.

One syndicate research report suggests that the revenue contribution from non-metallurgical construction, which includes the construction of transportation infrastructure, buildings, mining and environmental projects, and power and chemical plants, will increase to 45% of the total E&C business by 2011 from 36% this year, while the net profit contribution will rise to 34% from 30%. The growth will be driven by the government stimulus programme, recovering economic growth, an improving local property market and a gradual pickup in the international construction market.

The company has been expanding overseas since the early 1980s and have provided E&C contracting services in countries including India, Japan, Brazil, South Africa, Australia, Singapore and Canada.

In addition, state-owned MCC has also been building up a portfolio of large-scale resources assets abroad, focusing on those where China has a shortage of supply, including copper, nickel, iron ore and polysilicon. The same research report argues that this segment of its business will drive both growth and margin improvement over the next few years, and estimates that its revenue contribution will increase to 8.6% in 2011 from 4.2% in 2009, while Ebit will increase to 22.6% from 5.4%.

According to a term sheet sent to investors yesterday, part of the IPO proceeds will go towards the development and construction of overseas metallurgical and mine projects, the payment of mining rights, and potential acquisitions of overseas mineral reserves. The rest will be used for repayment of bank borrowings and as working capital.

Overall, syndicate analysts are projecting bottom line growth of about 50% in 2009 from the Rmb3.2 billion of net profit the company generated in 2008 and at least 30% in each of the following two years.

MCC's H-shares are scheduled to start trading in Hong Kong on September 24. The debut date for the A-shares hasn't been announced, but based on the timetable implemented by previous dual listings, it is likely to be before the 24th.

The three companies that started pre-marketing for a Hong Kong listing yesterday are:

Glorious Property: A Chinese property developer focusing on mid- to high-end residential housing in tier-1 markets like Shanghai, Tianjin and Beijing, but with supplementary developments in high-growth tier-2 cities. The company, which called off a planned listing in June last year, is looking to raise between $750 million and $1 billion with the help of Deutsche Bank and J.P. Morgan. UBS is also pursuing a yet to be specified role on this deal.

Yingde Gases: A provider of various gases such as oxygen, nitrogen, argon and hydrogen to the steel, chemical and energy industries. It is seeking to raise up to $300 million in a deal jointly led by Goldman Sachs and Morgan Stanley.

China Vanadium Titano-Magnetite Mining Co:
A Sichuan-based iron ore company engaged in mining, ore processing and the sale of iron concentrates, iron pellets and medium-grade titanium concentrates. It is seeking to raise about $250 million with the help of Citi and Deutsche Bank.

Outside Hong Kong, another Chinese company, US-listed Shanda Interactive Entertainment, has also started pre-marketing for the spin-off of its online games unit for a separate listing on Nasdaq. The company, named Shanda Games, may raise up to $800 million from the IPO, according to a US regulatory filing. Goldman Sachs and J.P. Morgan are the bookrunners.

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