Sinopec Engineering (Group) has raised HK$13.9 billion ($1.8 billion) from its Hong Kong initial public offering after fixing the price at HK$10.50 per share early Thursday morning last week, sources say.
The engineering and construction arm of China’s biggest oil refiner initially offered the shares at a price between HK$9.80 and HK$13.10 for a deal size of $1.7 billion to $2.2 billion. But on the final day of the bookbuilding, bankers told investors that the price would be fixed below the mid-point, in a narrower range between HK$10.50 and HK$11.
Demand from retail investors was strong enough to trigger a clawback, as with other recent deals in Hong Kong, but the company had sought a waiver from the stock exchange that meant only 5% of the deal was offered to retail investors initially and, even with the clawback, the retail tranche only increased to 7.5%.
According to the prospectus, the retail tranche would automatically increase to 7.5% if this portion of the deal was between 15 and 50 times covered; to 10% if it was between 50 and 100 times covered; and to 20% if it was more than 100 times covered.
As it were, retail investors subscribed to about 29 times the number of shares set aside for them, according to one source. This meant they committed roughly $3.25 billion to the deal — only slightly less than the $3.8 billion that they were prepared to invest in Galaxy Securities’ $1.1 billion IPO that closed a day earlier. However, without a waiver, Galaxy Securities ended up allocating 30% of the deal to retail investors (up from an initial 10%).
The Sinopec Engineering deal attracted “extremely” strong demand, and several hundred institutional investors came into the book, a source says. Just about every kind of investor took part, including sovereign wealth funds and corporate investors, the person notes.
There was good momentum from the start with big orders submitted from day one, another source said at the time of the launch.
Sinopec Engineering is a spinoff from state-owned oil and gas company China Petrochemical Corp (Sinopec Group), and is the biggest oil refining, petrochemical and new coal chemical engineering company in China.
The Hong Kong IPO market was abuzz with activity last week, reinvigorated in particular by the high-profile deals by Sinopec Engineering and Galaxy Securities. Galaxy Securities also priced its offering towards the low end of the initial price range.
Sinopec Engineering is the biggest IPO in Hong Kong since PICC’s $3.1 billion offering in November last year, according to Dealogic. Galaxy Securities ranks as the second biggest new listing this year. Galaxy Securities is set to start trading on Wednesday, with Sinopec Engineering following suit on Thursday.
Market participants will be watching closely how these deals fare in the aftermarket for indications of the potential appetite for other deals in the pipeline.
After being the world’s top IPO market in 2009 to 2011, Hong Kong slipped in the rankings last year. So far this year, the value of new listings in Hong Kong stands at $3.9 billion. That compares with $3.2 billion during the same period last year and puts the exchange as number four in the global exchange ranking after New York, Sao Paulo and Nasdaq, Dealogic data show.
Sinopec Engineering sold 1.328 billion new H-shares at HK$10.50 each, which represented a 2013 price-to-earnings ratio of 9.6 times. The initial price range valued the company at a 2013 P/E multiple of between nine times and 12 times.
The base deal represents about 30% of the company, although there is also a 15% greenshoe option. If exercised in full, it will increase the deal size to 33% of the enlarged share capital and the total proceeds to $2 billion.
Before the launch on May 6, the company had signed up seven cornerstone investors that had promised to buy a total of $350 million worth of shares, or just below 20% of the deal at the final price. There were some media reports last week suggesting that the largest of them, China Shipping (Hong Kong), which had committed to invest $100 million subject to regulatory approvals, would be dropped from the final line-up as all the necessary approvals had not yet come through.
However, as of yesterday, the expectation among the syndicate members was that the approval will be in place before the deal settles later this week and, for now at least, China Shipping is being allocated shares. And even if it is forced to drop out, bankers say it will have no effect on the overall transaction as there is plenty of excess long-only demand to take up that $100 million worth of shares.
The rest of the cornerstones are: 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.
Although there is no direct comparable, Sinopec Engineering 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, but 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.
Wison has gained about 50% since the listing and when Sinopec Engineering launched its IPO, it was trading at a 2013 P/E multiple of 10.3 times, according to Bloomberg data.
Sinopec Engineering plans to use the proceeds for the establishment of R&D centres, operation funds for major EPC (engineering, procurement and construction) projects, and the enhancement of its overseas marketing network, according to a term sheet. Some the money will also go towards IT system upgrades and purchases of large specialised construction equipment, as well as working capital and other general corporate purposes.
Like Galaxy Securities, which hired a record 21 bookrunners for its offering, Sinopec Engineering appointed a large group of banks — 13 to be exact — to work on its IPO. Citic Securities International, Goldman Sachs, J.P. Morgan and UBS acted as joint global coordinators and bookrunners, while Bank of America Merrill Lynch, BOC International, Bocom International, CICC, Citi, CMB International, Deutsche Bank, HSBC and Haitong International were mandated as bookrunners.
Sinopec Engineering was created last year from the merger of five units focusing on design and three units focusing on construction. Sources say it is involved in the entire construction process, from feasibility studies and front-end design to project management.
On top of being a market leader, it has a high return on equity (ROE) and a stable dividend policy, which would have added to the attraction. At the end of December last year, it had an ROE of 46.8% and it expects to distribute no less than 30% of its annual distributable net profit as dividends, according to the prospectus.
It booked Rmb3.3 billion in profits in 2012, up from Rmb2.9 billion in 2010.
Leveraging its established platform in China’s oil refining and chemical industries, it is growing its international presence and has participated in engineering, EPC contracting and construction 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.
Other issuers are also taking advantage of the gradual improvement in the Hong Kong IPO market. Mando China, which is a holding company for Mando Korea’s China operations and one of the leading suppliers in China of chassis-related automotive parts, is currently in the market with an IPO of up to $270 million. And Great Eagle-sponsored Langham Hospitality Investments is seeking to raise as much as $589 million from the listing of a hotel-focused trust.
Both Mando China and Langham Hospitality are set to close their order books this week.