Sinopec Engineering launches Hong Kong IPO of up to $2.2 billion

The unit of Sinopec Group and China Galaxy Securities kick-start the city’s muted IPO market. Sinopec Engineering’s deal would be the biggest in Hong Kong this year.
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A catalytic cracking plant in Hainan
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<div style="text-align: left;"> A catalytic cracking plant in Hainan </div>

Sinopec Engineering (Group) has started the management roadshow and bookbuilding for its Hong Kong initial public offering, aiming to raise between HK$13 billion and HK$17.4 billion ($1.7 billion to $2.2 billion).

Sinopec Engineering is a spinoff from state-owned oil and gas major China Petrochemical Corp (Sinopec Group), and is the biggest oil refining, petrochemical and new coal chemical engineering company in China.

After months of little activity in the city’s IPO market on the back of volatile global markets, Sinopec Engineering and China Galaxy Securities, which is aiming to raise up to $1.4 billion, broke the silence and launched their respective IPOs yesterday. If successful, Sinopec Engineering’s deal would be the biggest in Hong Kong since PICC’s $3.1 billion IPO in November last year, according to Dealogic.

The performance of these two sizable IPOs will also have an important implication for other deals in the pipeline in the city. Bankers are currently testing investor appetite for Great Eagle Holdings’s Langham Hospitality trust, which is seeking to raise up to $700 million. Hopewell Holding and New Word Development have said that they too are planning to spin off part of their hospitality portfolios.

So far this year, Hong Kong’s new listings volume stands at $1.1 billion, ranking the tenth in a global exchange ranking, down from $3.3 billion, or the third, during the same period last year, according to Dealogic.

Before the launch, Sinopec Engineering signed up seven cornerstone investors who have committed a total of $350 million. They are: China Shipping (Hong Kong) ($100 million); China Aerospace Investment ($60 million); Aerospace Science & Technology Finance ($50 million); China Export & Credit Insurance ($50 million); Zhongrong International Trust ($50 million); Albertson Capital ($30 million); and China CAMC Engineering ($10 million). The cornerstone investors and the company are subject to a six-month lock-up.

Large-sized orders are already coming into the book on day one, and there seems to be a good momentum, one source noted yesterday.

Sinopec Engineering is offering 1.328 billion shares for a price between HK$9.80 and HK$13.10 each, set to raise $1.7 billion to $2.2 billion. The base deal size represents about 30% of the enlarged share capital of the company. Of the deal, 5% is set aside for the Hong Kong public, and the remaining 95% is targeted for the international tranche.

There is a 15% greenshoe option that if exercised in full could increase the size to as much as $2.6 billion.

The price range values Sinopec Engineering at a 2013 price-to-earnings ratio of between nine times and 12 times. Although there is no direct comp, the company has a similar business model to Wison Engineering Services, which listed in Hong Kong at the end of December.

Wison focuses both on the petrochemical and coal chemical industries and being a private-sector company it is significantly smaller than Sinopec Engineering — it raised $216 million from the IPO, which gave it a market cap of about $1.4 billion.

However, the stock has gained 38% since the listing, suggesting investors are generally positive about the industry. Wison is currently trading at a 2013 P/E multiple of 10.3 times, according to Bloomberg data.

On top of being a market leader, investors likely find Sinopec Engineering’s high return-on-equity (ROE) and a stable dividend policy attractive. It had the ROE of 46.8% as of end-December last year, and in the future it expects to distribute no less than 30% of its annual distributable net profits as dividends, according to the prospectus.

For the year to December last year, it booked Rmb3.3 billion in profit, up from Rmb2.9 billion in 2010.

According to the current timetable, the books are expected to close on May 15, with the pricing the next day in Hong Kong time. The Hong Kong public offering is expected to start on May 10 and continue until May 15. The listing is scheduled for May 23.

The company plans to use the proceeds for the establishment of R&D centres, operation funds for major EPC (engineering, procurement and construction) projects, the enhancement of overseas marketing network, according to a term sheet. It also plans to use the money to upgrade the IT system, to purchase large specialised construction equipment, as well as for working capital and other general corporate purposes.

Like Galaxy, Sinopec Engineering has also appointed a large group of banks to work on its IPO. Citic Securities International, Goldman Sachs, J.P. Morgan and UBS are joint global coordinators for the deal. They are joined as bookrunners by Bank of America Merrill Lynch, BOC International, Bocom International Securities, CICC, Citi, CMB International, Deutsche Bank, HSBC, and Haitong International.

Sinopec Engineering was created last year from the merger of five units focusing on design and three units focusing on construction. Sources describe it as “China’s leading refining and petrochemical engineering, procurement and construction company”, and say it is involved in the entire construction process, from feasibility studies and front-end design to project management.

At the moment it derives more than half of its revenues from its state-owned parent company, which is the biggest refiner in Asia. However, part of the intention with the listing is to raise the company’s international profile and help it win overseas engineering and construction contracts.

Leveraging its established platform in China’s oil refining and chemical industries, it has established a growing international presence and participated in the engineering, EPC contracting and construction of overseas projects in the Middle East, Central Asia, Asia Pacific, Africa, South America and North America, according to the prospectus.

As of the end of last year, its major clients included Sinopec Group, Cnooc, CNPC, Exxon Mobil, BP and Shell, it says.

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