Sany Heavy Equipment gets going as Mingfa finally crosses the finish line

As the Chinese manufacturer of tunnelling machinery starts its roadshow, Mingfa mines new lows in terms of Chinese property IPO valuations.

Sany Heavy Equipment International, a Chinese manufacturer of coal mining equipment, on Monday launched an initial public offering that could raise up to HK$2.4 billion ($309 million). At the same time, Chinese property developer Mingfa Group has completed its prolonged IPO, raising $278 million.

Sany is selling 500 million shares, all primary, at a price between HK$4.10 and HK$4.80. This translates into 11.1 to 13 times 2010 projected earnings.

The company is China's leading manufacturer of roadheaders, which are machines used in mining to create tunnels. Its competitive edge is that it is able to manufacture roadheaders in China at a level of quality that allows it to compete with international players, but at a significantly lower price. It is also the first Chinese company to have branched out into making combined coal mining machinery, which incorporates mining, structural support and conveyance, into one automated unit.

The company is part of the Sany Group, a major supplier of equipment to civil engineering and construction firms in China. The other main company in the group is Sany Heavy Industry, a Shanghai-listed outfit that manufactures engineering machinery for construction use.

Coal mining equipment is a rapidly growing sector in China, partly because the increasing cost of coal has allowed miners to earn enough cash that can be used to splash out on better equipment. And there is a growing emphasis on quality, because a malfunctioning machine, even for just a day, can lead to large losses. Sany is already benefiting from these trends. In the first half of 2009, net profit was Rmb250 million ($37 million), 222% up on the same period last year.

There are already two cornerstones investors in the IPO: Government of Singapore Investment Corporation (GIC), Singapore's largest sovereign wealth fund, will take $25 million worth of shares; and GE Capital will invest another $12.5 million.

HSBC and Standard Chartered are joint bookrunners for the deal, which is expected to price on November 17.

As Sany's IPO gets going, another deal finally got done. Mingfa priced its IPO at HK$2.39 a share, at the middle of an indicative range that went from HK$2 to HK$2.89, raising $278 million.

This is well below the amount the company was looking for at the outset. Last month it launched the offering on terms that could have raised as much as $440 million. At the time, other developers were postponing their deals or pricing near the bottom. Although the deal could have been covered at the original range, according to a source, Mingfa decided to relaunch its IPO with a lower price range in order to give aftermarket trading a boost.

Institutional investors that had subscribed to the deal on the first set of terms were said to stay in at the lower price. They included a mix of long-only funds, hedge funds and property specialists. The retail tranche was approximately 80% covered.

The final price values the company at a discount of 68.2% versus its estimated 2010 net asset value (NAV), which sets a new valuation low among the recent flurry of IPOs by Chinese developers. To put this into perspective, another developer, Evergrande Real Estate raised $726.2 million at a 48.5% discount to NAV in a deal that was generally considered to be cheap. Meanwhile, Longfor Properties is looking for up to $916 million at a discount of between 30% and 39% to 2010 NAV in a deal that is due to price today, and Fantasia Holdings Group is trying to raise as much as $413 million at a discount of between 54.3% and 62.8%.

Bank of America Merrill Lynch, Bocom International and Deutsche Bank were joint bookrunners for Mingfa's IPO.

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