Shanghai Electric generates the right buzz

Solid if price sensitive order book may lift lifeless IPO market.

Shanghai Electric priced its 2.97 billion share IPO on Friday, raising HK$5.05 billion ($648 million) from the Credit Suisse First Boston led deal. The offering was priced at HK$1.70 per share, a quarter off the top of a HK$1.50 to HK$1.76 range.

The institutional order book is said to have closed four times covered and the retail order book 11.7 times covered, triggering no clawbacks. Allocations saw retail receive 10%, a Daiwa SMBC-led POWL (Public Offering Without Listing) 8%, strategic investor Siemens 5% and institutions the remaining 77%.

Theoretically the deal could have been priced at the very top of the range, but both the issuer and lead manager took a sensible view of current market conditions and tried to ensure secondary market follow-through buying by leaving some slack. The Greater China IPO market desperately needs a good deal given the dearth of issuance since Foxconn's $476 million deal at the end of January and the heavy pipeline building over the next few months, with IPO's expected from the Shenhua, Minsheng and Cosco groups.

Specialists report about 150 accounts in Shanghai Electric's deal and say the order book was very top heavy with several $100 million plus orders and a very short tail, which made allocations fairly straightforward.

The deal has been priced at 14.3 times 2005 projected earnings of Rmb1.5 billion ($181 million). At this level, it has come at a premium to the H-share sector, which currently averages around 10 to 11 times.

It has also come at a premium to one of its nearest comparables - Dongfang Electrical Machinery, which trades around 10 times. However, it has come at a discount to its other close comparable - Harbin Power, which is now trading around 16 times 2005 earnings.

At the beginning of roadshows, Shanghai Electric hoped to price at a premium to both companies and believed one was justified on the basis of its much larger scale and market share. Both Dongfang Electrical and Harbin Power also have much smaller market capitalizations of sub $500 million compared to Shanghai Electric's $2.6 billion.

At this point, Harbin was trading around 13 times and Dongfang eight times. But both companies have bucked the market trend in recent weeks, with roadshows for Shanghai Electric having a beneficial effect on Dongfang and Harbin as investors re-focused on the sector and found the valuations attractive.

Between the publication of IPO research on March 21 and mid April, the two traded up 35%. Since then, they have now come down in line with volatile markets and are up about 25% over the entire period. By contrast the H-share index has come off 7% over the same period.

Investors that believe Shanghai Electric inherently deserves a premium to Harbin may, therefore, view the IPO as an attractive entry point. Global comparables such as Siemens trade at around 15.5 times earnings.

Specialists say the order book would have built greater momentum but for the mini-meltdown in the US on Friday April 15, which fed through to Asia the following Monday. However, it was given a last minute boost by China's publication of first quarter GDP figures, which shows the economy continuing to barrel along at 9.5%.

"Some investors took this as a sign that Shanghai Electric's earnings are not peaking and may not do so until 2007 now," says one observer. Conversely it also means the group is likely to be hit by high steel prices for longer than anticipated - the commodity accounts for over 50% of the company's total costs.

"This is a classic Chinese industrial play, which benefits from strong growth particularly in the power sector," notes one banker.

It has four main divisions: power equipment, which account for 50% of sales; electro-mechancial items, which account for 35% of sales; transportation, which accounts for 15% of sales and environmental protection equipment, which accounts for 2% of sales. At the end of 2004, the company recorded sales of Rmb25 billion ($3 billion) and net income of Rmb1.1 billion. It has assets of Rmb47 billion.

EBITDA has been growing at CAGR of 40% since 2002.

The stock will yield about 1.8%.

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