Shanghai Dazhong launches H-share offering

Gas supplier opts to push ahead with deal in latest vote of confidence for Hong Kong’s stock market. More will follow as US election shockwaves continue to subside.
Shanghai Dazhong is the largest gas supplier in Shanghai
Shanghai Dazhong is the largest gas supplier in Shanghai

Shanghai Dazhong Public Utilities launched a H-share offering in the $207 million to $262 million range on Monday, putting it on course to be the fourth company to list in Hong Kong since Donald Trump's US election victory put global markets in a spin.

Chinese fast food retailer Zhou Hei Ya and energy conservation company Datang Environmental Industry have floated their shares since November 8, while generator manufacturer VPower is set to debut on Thursday.

Apart from Shanghai Dazhong, China Securities and FIT Hon Teng have also started pre-deal investor education and both aim to complete their flotations by year-end. Smartphone manufacturer Meitu is the latest company to join the year-end IPO rush, having started gauging investor demand on Monday.

The fact Asian stock markets have largely stabilised following the US election surprise appears to have given these companies confidence to push their deals forward. Hong Kong stocks are down about 2.5% since the US election, defying the expectation of most analysts that the market could see a double-digit loss in the once-unlikely event of a Trump victory.

In fact, while the city's stock index is trading at the lowest level in three months, it is still higher than in the first eight months of this year.

However, Shanghai Dazhong has prepared for the worst. It secured cornerstone commitment totalling $140 million from five investors, meaning it needs only $67 million from public investors to get the deal done. Most of the cornerstones are also gas suppliers, a sign the offering's main appeal is likely to be to public utilities specialists.

ENN Energy, Towngas and Suchang Gas have pledged $60 million, $25 million and $20 million respectively, while New China Asset Management and CRRC will invest $25 million and $10 million.

Shanghai Dazhong is also selling the H-shares at a big discount to its Shanghai-listed shares. The 479 million-share sale is being pitched at HK$3.35 to HK$4.25 per share, a discount of 41% to 53% on the stock’s Rmb6.4 (HK$7.2) Friday close in Shanghai.

Yet the public float of the H-shares will be much smaller than in Shanghai. According to a termsheet seen by FinanceAsia, the H-shares equate to about 16.5% of the firm’s enlarged share capital, a little over a quarter of the stock's 58% free float on the Shanghai Stock Exchange.

Shanghai Dazhong 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 the 12.5% for its main gas business.

It has a 9.5% stake in Shanghai-listed Dazhong Transportation. The stake is valued at $149 million, based on the stock's current market price.

The company will use most of the proceeds for expansion, including investment in gas supply businesses and acquisition of gas suppliers, according to its prospectus.

Shanghai Dazhong will conduct its management roadshow until November 28 and aims to list the H-shares on December 5.

CICC and Haitong Securities are joint sponsors of the deal.

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