Newton Resources, the Chinese iron ore mining company that was taken over by the New World group last year, has priced its initial public offering at the bottom of the indicated range, allowing it to raise HK$1.75 billion ($225 million) ahead of its listing in Hong Kong on July 4, according to an announcement by its parent company NWS Holdings yesterday. This makes it the second Hong Kong listing candidate to succeed in completing an IPO above $100 million last week when three other deals were cancelled due to the difficult market environment.
However, according to sources, Newton’s IPO became fully covered only after one of the four bookrunners, Bocom International, agreed to buy a portion of the deal. The size of Bocom’s investment isn’t known, but it was said to be one of the top five orders in the book. It is also expected to be large enough that it needs to be disclosed under Hong Kong stock exchange regulations — ie, it accounts for more than 5% of the outstanding share capital. Given that Bocom is a bookrunner though, the investment will need to be disclosed either way, so more clarity is expected later this week when Newton announces the retail allocations.
Aside from Bocom, the institutional tranche was bought primarily by a mixture of Chinese QDII funds and friends of the New World group. There wasn’t a huge amount of interest from traditional long-only funds and virtually no participation from hedge funds — of the few hedge funds that did come in, most dropped out again towards the end of the bookbuilding.
Close to 23% of the deal, or HK$400 million ($51 million) worth of shares, was also bought by Shougang Hong Kong, which came in as a cornerstone investor with a 12-month lockup. Shougang Hong Kong is active in the manufacturing and trading of steel and metallic products, as well as shipping, mining, property investments and financial services. It is a subsidiary of Shougang Corp, a Chinese state-owned enterprise focusing on steel manufacturing. Shougang Hong Kong has also signed an off-take agreement to buy 30% of Newton’s annual production of iron ore concentrate at a 3% discount to the market price.
Consequently, the demand for the IPO came almost exclusively from the region. According to a banker, US and European interest in mid-cap Chinese IPOs is severely depleted, which could be a result of the current poor performance of the secondary markets, but may also be related to the accounting scandals surrounding a number of small and mid-cap Chinese companies listed in the US that have surfaced over the past few months.
Contrary to many other recent IPOs, including Prada’s highly anticipated offering earlier this month, and Tibet 5100 Water Resources Holdings’ $177 million deal that was the only other Hong Kong IPO to successfully price last week, Newton Resources’ 10% retail tranche was fully covered. In fact, it was said to be 1.3 times subscribed. The fact that the company is backed by the New World group, which is controlled by one of Hong Kong’s most well-known tycoons, Cheng Yu Tung, may have attracted some investors to the deal. At the same time, Cheng has a large network of friends that may be convinced to lend a hand if one of his deals is in a tight spot.
With regard to the institutional tranche, it does seem that the shares have been placed in fairly secure hands, which should help support the stock when it starts trading. However, the bookrunners have not allocated a greenshoe, which means they don’t have any shares to buy back to help stabilise the price if it was to fall below the issue price. The most likely reason for that is that the subscription wasn’t great enough to allow for any over-allotment.
Newton sold a total of 1 billion shares, or 20% of the enlarged share capital. Some 80% of the shares were new, while the remaining 20% was secondary shares sold by VMS, an investment and advisory firm linked to the New World group through various co-investments. VMS participated in the buyout of Newton last year alongside infrastructure-focused NWS Holdings and will own 27% of the company after the IPO. NWS Holdings, which is 59.8% owned by the group’s listed flagship, New World Development, will hold 48%.
The shares were offered at a price between HK$1.75 and HK$2.35 and fixed at the bottom of the range. The final price translates into 5.1 times Newton’s estimated earnings for 2012 — the first full year of operations for its Yanjiazhuang mine following a three-phase expansion. The open-pit mine, which is located in China’s largest steel producing province — Hebei — started commercial production in January this year and is scheduled to reach its targeted annual production capacity of 10.5 million tonnes in the second quarter next year.
The mine has proved and probable reserves of 260 million tonnes, which makes it the sixth largest iron ore mine in Hebei and the largest privately owned one. Aside from iron ore it also has 207 million cubic metres of gabbro-diabase resources. Gabbro-diabase is a hard and durable rock that is commonly used for indoor flooring, high-end counter tops and other interior decorative materials.
Newton comes at a discount to China Vanadium Titano-Magnetite Mining, an iron ore producer based in the Sichuan province which currently trades at a 2012 P/E multiple of 6.3, according to Bloomberg. China Vanadium share price has been on a declining trend since mid-April, but rebounded last week during Newton’s roadshow, adding 14.3% over the course of four days.
This was Newton’s second attempt at a Hong Kong listing. The previous attempt in May last year, under the name of China Tian Yuan Mining, was called off after its controlling shareholder was implicated in an alleged stock manipulation and fraud case involving a separate company in the US. That shareholder has since sold his entire stake in the company to New World and VMS.
The IPO was arranged by Bocom International, Citi, Macquarie and VMS.
The difficult market environment has prompted China Everbright Bank to hold off on launching a formal roadshow this week. The bank, which is already listed in Shanghai, has been pre-marketing for two weeks and is aiming to launch and price its Hong Kong IPO before the end of July, according to sources. Because the company used end-of-March accounts in its listing application, it is not bound by the June 30 deadline that applies to companies using end-of-December figures and therefore it can afford to wait for a potential equity market improvement before launch.
The bank is expected to raise more than $5 billion from what could become Hong Kong’s largest IPO so far this year by selling 20.6% of its enlarged share capital.
China International Capital Corp, Morgan Stanley, UBS and China Everbright’s own investment banking arm are joint global coordinators for the offering. They are also joint bookrunners together with a whole slew of other banks, namely BNP Paribas, BOC International, HSBC, J.P. Morgan and Shenyin Wanguo Securities.
Other companies don’t have the same flexibility with regard to timing, however, and according to sources, China Hanking Holdings is expected to kick off its institutional roadshow sometime this week — potentially as early as today — so as not to have to update its accounts. The company is said to have been in discussions with its bookrunners since last week about the appropriate valuation. A low-cost iron ore mining company with four operating mines and five processing plants, Hanking is expected to raise up to $300 million. The deal is being arranged by BNP Paribas, Credit Suisse and Deutsche Bank.
Also set to open the institutional order books today after one week of investor education is Sun Art Retail Group. The company, which operates hypermarkets in China under the RT-Mart and Auchan brands, is expected to raise about $1 billion and has mandated Citi, HSBC and UBS to help it do so. Sources say there is a lot of interest in this company, which is viewed as “best-in-class” compared to other listed Chinese companies in the same sector.
Meanwhile, Beijing Jingneng Clean Energy is set to price its Hong Kong IPO after the US close on Wednesday. The company, which operates gas-fired and wind-powered electricity generating plants is seeking to raise between $494 million and $630 million with the help of Barclays Capital, BOC International, Goldman Sachs, Macquarie and UBS. Sources say the deal is covered, but as evidenced by a couple of the cancelled deals last week, in the current market environment that is not a guarantee that it will actually price.
