Coming a day after Chongqing Machinery priced its initial share offering at the bottom, ShandongÆs decision to accept the minimum price perpetuates the recent trend of Hong Kong IPOs pricing at or near the low end û a trend that has been broken only by Little Sheep. Restaurant operator Little Sheep, which is due to start trading today, last week priced its offering at the mid-point of the indicated range.
In an attempt to limit its exposure to market risk Shandong Chenming closed its institutional books at the end of Thursday trading in the US, and thus managed to avoid being affected by the 3.1% decline in the Dow Jones index in the US on Friday and the 4.2% drop in the Hang Seng Index on Tuesday (the Hong Kong market was closed for a holiday on Monday). The Hong Kong retail offering closed at noon on Tuesday.
The institutional portion of the deal, which accounted for 90% of the total, attracted about 100 accounts, which one source says was particularly good for a deal this size. He also notes that the price could have been fixed much higher, but with the market having fallen so much in recent days, it was set at the low end to give the stock as much of ôa bufferö as possible to help it trade well in the aftermarket. The retail tranche was said to have been oversubscribed.
Even at the low end, though, Shandong Chenming is the largest Hong Kong IPO in the second quarter and the third largest year-to-date after China Railway Construction Corporation and Want Want China Holdings, which raised $2.3 billion and $1.04 billion respectively. It will squeeze in just ahead of onshore drill rig manufacturer Honghua Group which raised HK$3.19 billion ($409.2 million).
The IPO price values Shandong Chenming at a price-to-earnings ratio of 8.8 times based on projected earnings for 2008, putting the company at a discount to two other paper product manufacturers: a 26% discount to Nine Dragons, which trades at 12.1 times; and an 18.5% discount to Lee & Man Paper, which is quoted at 10.8 times. Both companies experienced big drops in their share prices in March and Lee & Man has continued that trend with a 14.5% decline since the end of May.
Due to the recent poor record of these paper producers, advocates of Shandong Chenming were quick to highlight the differences, particularly the fact that it offers a diverse portfolio of paper products, while Nine Dragons and Lee & Man both focus on paper for packaging. The listing candidate is also highly self-sufficient with regard to pulp, and this will increase further as it spends its new capital on a pulping facility.
As a result of the Hong Kong IPO, Shandong Chenming will be the first company to have issued A-, B- and H-shares. This had some significance for the deal as the China Securities Regulatory Commission required that the H-shares be priced in between the A- and B-shares. Since the bookbuilding started on May 26, the A- and B-shares have dropped 17% and 8% respectively. The final H-share price represents a 15% premium to its B-share, which one source says is ôa reflection of the international guys wanting to get into the dealö.
Around 50% of the institutional demand came from Asia, 30% from the US and the rest from Europe. A source says that there was a majority of long-only funds, and the hedge funds that got involved were ones with a track record of holding on to their investments for the longer term.
The company sold 355.7 million new H-shares, which represent 17.5% of the companyÆs enlarged share capital. There is also a 15% greenshoe that could increase this portion to 19.34% and the total proceeds to as much as $472 million. The deal was arranged by Guotai Junan and Macquarie.
Investors will be wondering whether the fate of Shandong Chenming can be replicated by another company from the same region that is currently pre-marketing for a Hong Kong listing. China Shanshui Cement Group is the largest cement producer in the northeastern provinces of Shandong and Liaoning, and one of 12 national cement consolidators, meaning that it can receive government support when engaging in mergers and acquisitions. It is expected to see its earnings quadruple between 2007 and 2009.
The company will be selling 25% of its share capital and the deal is expected to fetch between $300 million and $400 million. The listing is being arranged by Credit Suisse and Morgan Stanley, with the bookbuilding scheduled to commence on June 16.
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