Race to list: more Hong Kong IPOs on way

Datang Environment, FIT Hon Teng and Shanghai Dazhong look to raise over $1 billion from listings in November. For investors, they offer a change after a run of financial IPOs.

Activity in Hong Kong's equity capital markets is set to pick up steam in November, with three more companies this week entering the final stages of preparing to launch deals.

Datang Environment, FIT Hon Teng and Shanghai Dazhong Public Utilities kicked off pre-deal investor education for upcoming initial public offerings this week, joining the likes VPower and Zhou Hei Ya, both of which started the process last week.

They will vie for market attention as all three aim to list by the end of November. However, the ferocity of the contest will be tempered by the fact the five engage in far different industries.

For investors, this is good news: they will be able to select from a whole range of businesses beyond the financial sector, which has dominated new listings in Hong Kong this year. A slew of billion-dollar deals in the sector include those by Postal Savings Bank of China, China Merchants Securities, Orient Securities and China Zheshang Bank.

Financial institutions have raised $12.8 billion in Hong Kong year-to-date according to data provider Dealogic, 71% of all Hong Kong’s IPO proceeds in the period.

Those big money listings haven't exactly turned into profits for investors as China’s slowing economy and depressed interest rates weigh on the profitability of banks, while earnings for brokerages are under pressure following China’s stock market plunge early this year.

Shares in Postal Savings Bank of China, which raised $7.4 billion in the world’s largest IPO of 2016, are down 10% less than a month after its listing in late September.

As such, the fresh queue of mid-sized non-financial IPOs, which have businesses ranging from utilities, consumer, industrial and energy, are likely to draw market attention despite their smaller deal size.

Datang Environment

China Datang Group, a state-owned power generator, is reviving plans to list its environmental protection and energy conservation business following an initial attempt late last year.

The subsidiary, known as Datang Environment Industry, soft-marketed a deal last December but decided against an official launch amid weak stock market sentiment. In fact, Hong Kong’s Hang Seng Index traded lower for eight months thereafter, which might suggest senior management made the right call.

It is now reviving the listing plan at a time when the broader market is beginning to show signs of weakness, as investors take a wait-and-see approach ahead of the presidential election in the US early next month. That said, the benchmark index is still slightly higher than it was in December last year.

Pushing back the share sale also gives Datang Environment a chance to display better operational figures to bolster its valuation. Its first quarter revenue of Rmb1.47 billion ($217 million) was 68% higher than in the same period last year, while net profit also edged up 3.5% to $22 million.

Datang Environment’s main businesses are desulfurization and denitrification – processes that allow coal-fired power generators to reduce emissions of sulfur dioxide and nitrate gases. It acts as a contractor to help power producers achieve gas emission targets, and in return it gets a share of the benefits power producers receive from the government.

It is seeking about $400 million from the IPO via sole sponsor Citic CLSA, according to people familiar with the situation.

FIT Hon Teng

At the same time, Taiwan’s Hon Hai Precision Industry is spinning off its connector business to raise funds for product development and business expansion.

The world’s largest manufacturer of electronics components is seeking $400 million through an all-primary share IPO of FIT Hon Teng, which makes cables, connectors, antennas, optical modules and wireless products. The company, which decribes itself as the largest connector maker in Greater China with a 11.7% market share, is 92.57% owned by Hon Hai.

FIT Hon Teng said demand for advanced interconnect products was growing rapidly as the product life cycle for mobile phones, tablets and gadgets became shorter. Repeated product upgrades mean accessory makers like FIT Hon Teng will be able to launch new products to grow.

The company sees wireless charging for mobile phones as one of the growth drivers. While it counts copper cables and connectors as one of its main revenue sources, it is gradually expanding production of fiber optic connectors as its use becomes more popular in the industry.

The IPO comes at an interesting time for technology in China, amid industry expectations that the nation will begin trials of 5G telecommunication technology by the end of the year. By 2020 the world’s second largest economy is tipped to commercialise 5G technology, a high-speed means of transmission that is tipped to be 20 times faster than the present 4G network.

Bank of America Merrill Lynch, CICC and Credit Suisse are joint bookrunners.

Shanghai Dazhong Public Utilities

Shanghai-listed gas supplier Shanghai Dazhong Public Utilities plans to raise about $300 million from a H-share offering towards the end of next month, according to people familiar with the matter.

The company appears to have missed the ideal time to list last year when China’s stock market frenzy sent its Shanghai shares to as high as Rmb15.78. It has since retreated more than 50% to about Rmb6.5 and has been trading around the level since the beginning of this year.

Shanghai Dazhong Public Utilities counts gas supply as its main business, accounting for 94.4% of its Rmb4.3 billion revenue last year. It is the largest gas supplier in Shanghai and has a dominant market share in nearby Nantong, a prefecture-level city in Jiangsu province.

Yet a significant portion of its profit came from other businesses including public infrastructure projects, micro-credit and financial leasing. These businesses reported gross profit margins of more than 80% over the past two years, much higher than 12.5% for its main gas business.

It remains to be seen whether Shanghai Dazhong Public Utilities will prove popular among income investors given it has not been a high-dividend stock historically. The company’s dividend yield has dropped for four straight years from 169 basis points in 2012 to 23 basis points last year.

CICC and Haitong Securities are joint bookrunners.

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