Sinopec Engineering to launch Hong Kong’s largest IPO this year

The engineering and construction arm of Asia’s largest refiner will start pre-marketing for an IPO of about $1.5 billion tomorrow. Meanwhile, Galaxy Securities delays its planned launch as CSRC approval and cornerstones aren’t yet in place.
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Hong Kong ranks just ninth for IPOs this year
<div style="text-align: left;"> Hong Kong ranks just ninth for IPOs this year </div>

It has taken a while, but Hong Kong’s first billion-dollar IPO this year is finally about to hit the market. And with a number of other large deals in the pipeline, it is under a lot of pressure to do well.

The one to test the market — and investor appetite — is Sinopec Engineering, a spinoff from state-owned oil and gas giant China Petrochemical Corp (Sinopec Group) that focuses on the construction of refineries.

According to sources, the company is aiming to raise about $1.5 billion from the sale of 25% to 30% of its share capital.

The Hong Kong stock exchange approved Sinopec Engineering’s listing application on Thursday last week and on the same night also gave the go-ahead for a similar-sized IPO by Galaxy Securities. The two deals won’t be going head-to-head, however, as the Chinese brokerage still needs final approval from the Chinese regulators before it can start marketing.

Initially bankers planned to launch the investor education for Galaxy next Monday (April 22), but sources said yesterday that the start date will be pushed back by at least one week. And depending on how the preparations go, it may not actually launch until the first or second week of May.

Chinese listing candidates typically don’t attend a Hong Kong listing hearing until they have got the green light from the China Securities Regulatory Commission (CSRC), but some sources say the Hong Kong hearing came a little earlier than expected. An indication that the Hong Kong stock exchange is less busy with new applications than usual, perhaps?

So far this year there have been only nine IPOs in Hong Kong, raising a combined $1.06 billion. According to Dealogic, this means Hong Kong, which was the world’s biggest IPO market from 2009 to 2011, ranks only ninth in terms of new listings this year. The US, which is the market leader, has seen close to 10 times the volume.

The CSRC approval is obviously crucial, but it is not the only thing that has to fall into place for Galaxy. Almost as important is the need to sign up cornerstone investors to give the deal some early momentum and help support the valuation. The progress on this seems to be somewhat slow, suggesting that investors may not see any obvious reasons why they should put their money into Galaxy at a time when trading volumes in the Chinese stock market are falling and approvals for domestic A-share IPOs have been at a halt for the past six months.

According to one source, Galaxy’s market share has been declining and its cost-to-income ratio is the highest in the industry. And earlier this week the Wall Street Journal quoted a pre-IPO prospectus saying that the company’s net profit fell 10% in 2012 on the back of a 7.4% drop in revenues. Commissions and other fee income fell by close to 18%.

Also, investors who do like the long-term potential of the sector have the option of buying Haitong Securities or Citic Securities, which are already listed in Hong Kong.

This suggests that in order to get investors’ attention, Galaxy will need to come at a sizeable discount to its two Hong Kong-listed rivals, which are quoted at a 2013 price-to-book multiples of about 1.3 and 1.6 respectively, according to Bloomberg data. However, the Chinese government, as Galaxy’s largest owner, will need to agree on a price at which it is comfortable to get diluted and sources say it has indicated that it doesn’t want the discount versus Haitong Securities to be too wide.

Haitong Securities and Citic Securities have seen their share prices drop by 25% and 23% respectively this year in light of the challenging market environment.

The Chinese government owns about 70% of Galaxy Securities through Central Huijin Investment Co, an investment company that holds stakes in various state-owned enterprises.

Galaxy’s IPO will be led by Goldman Sachs, J.P. Morgan and Galaxy Securities itself, which are joint sponsors and global coordinators. Including these three, the company has mandated a total of 16 bookrunners, putting it almost on par with PICC Group which used a record 17 bookrunners for its Hong Kong IPO in the fourth quarter last year. As can be expected, the line-up includes most of the bulge-bracket firms, with the notable exception of Morgan Stanley, and several Chinese banks.

Sinopec Engineering has been somewhat more selective in its choice of banks, although having initially mandated 10 firms it appears to have added two more last week. And even though investor education is due to start tomorrow, the issuer has still not confirmed the roles within the syndicate. As a result, there is a lack of coordination when it comes to the signing up of cornerstones and no one bank seems to have the full picture of what is going on.

It is widely expected that the three sponsors — Citic Securities, J.P. Morgan and UBS — will also become global coordinators, although whether they will be joined by one or two other firms is still up in the air.

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 largest 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.

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 34% since the listing, suggesting investors are generally positive about the industry. Wison is currently trading at a 2013 price-to-earnings multiple of 10 times, based on the consensus syndicate forecasts at the time of the IPO.

The timetable for Sinopec Engineering’s IPO hasn’t been set in stone yet, but the investor education is expected to last for at least one week. Whether it will be a full two weeks will depend on whether the issuer decides to continue the process after the May 1 holiday, which falls in the middle of the second week.

The largest Hong Kong IPO so far this year is Chinalco Mining International, a unit of state-owned Aluminum Corp of China and the owner of a greenfield copper deposit in Peru, which raised $399 million in January. The stock hasn’t performed well, however, and yesterday it closed 26% below the IPO price.

Some of the smaller newcomers this year have also performed poorly and, as a result, investors have remained cautious about new listings. Bankers are hoping that Sinopec Engineering will be able to change that so that the listing candidates waiting on the sidelines can start to tap the market without having to offer a massive discount versus their peers.

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