The top-end pricing was no great surprise after sources said the current declining trend in the secondary market had little noticeable impact on the order flow. While no subscription ratios were available for the institutional book, it reportedly contained a large portion of ôgood qualityö long-only funds; and there was virtually no price sensitivity. One source says more than 400 accounts participated.
Meanwhile, the retail portion of the offering was more than 300 times covered, triggering a full clawback that increased the size of the retail tranche to 50% of the total deal from the initial 10%.
But while the size of the order book clearly supported fixing the price at the top of the HK$10 to HK$12.88 range, the secondary market backdrop wasnÆt as straight-forward. While the Hang Seng finished up 1.1% on the final day of the bookbuild (November 20), it had fallen just over 1,000 points, or 3.5%, during the seven-day roadshow. The market has also become increasingly volatile with losses if 3.95% and 3.88% on two separate days last week and, in between those two, a day where the HSI was up 4.9%.
After the deal was priced in the early hours of yesterday morning, the Hong Kong market slumped another 4.2% and has now lost a total of 5,020 points, or 15.9%, since it closed at a record high of 31.638 points on October 30. And with concerns about a prolonged credit crunch and its potential impact on global growth remaining very much alive, there are no signs that the correction has reached the bottom just yet.
Sinotruk isnÆt due to start trading until November 28, so there are obvious risks of further declines that could make the stock look relatively less attractive. In fact, the premium versus one of its closest comparables has already widened significantly during the roadshow.
In light of that, the bookrunners were believed to have suggested to the company that leaving some money on the table by fixing the price below the top of the range would be welcome by the investors. However, the management obviously chose against that.
ôI think the argument was that if the bottom falls out of the market, having left a few cents on the table, wonÆt be of much help anyway,ö says one source.
No doubt, everyone involved in the Sinotruk offering will be watching todayÆs trading debut of Hong Kong asset management firm Value Partners to see whether the strong support shown during the IPO process will continue as the stock enters the volatile secondary market, or whether investors will try to book profits early and pack up for the year.
Value Partners raised $376 million pre-greenshoe with 50% of that going to retail investors and almost 40% to strategic investor Ping An Insurance, leaving very few shares to divvy up among other institutional investors. Some investors say they got zero allocations on this deal, which suggests that bookrunners JPMorgan and Morgan Stanley may have tried to concentrate the shares in fewer hands to make sure investors donÆt feel their stake is too small to be worth hanging on to.
Sinotruk too set aside a portion of its offering to eight cornerstone investors. However, with a combined investment of $200 million û each took $25 million û they will take only 17.2% of the total deal. The cornerstones include all the usual suspects: Government Investment Corp of Singapore, the Kerry group, Chow Tai Fook, China Life Insurance, Citic Pacific, BOC Investment, Dickson Poon and, as one entity, the Li Ka-shing Foundation and a subsidiary of Cheung Kong (Holdings).
The company, which aside from actual trucks also makes key components such as engines, cabins and axles, sold 31.8% of its share capital in the form of 702 million new shares. There is a 15% greenshoe, which could boost the total proceeds to $1.33 billion. If the shoe is fully exercised, 35% of the Sinotruk will be in public hands. China International Capital Corp and JPMorgan are joint bookrunners.
The IPO price values the truck maker at 18.8 times its 2008 earnings, based on the average estimate by the two bookrunners. When the roadshow was launched, this represented a slight premium to Hong Kong-listed Weichai Power, which traded at 16.5 times. However, Weichai was already on a declining trend by then û having fallen 11.5% the previous week û and the losses have intensified since then, pushing its 2008 price-to-earnings multiple to 13.9 times as of yesterdayÆs close.
Weichai, which started as an engine manufacturer but migrated into the production of heavy trucks as well, is considered by syndicate analysts to be the closest comparable. The same analysts argue that Sinotruk deserves a premium because of its stronger market position and greater growth profile, but the key question is how much of a premium the current market environment can support.
According to a syndicate research report dated early this month, the global commercial vehicle manufacturers trade at an average 2008 price-to-earnings multiple of 14.5 times, while the Asian players fetch an average multiple of 12.9. However, most of these companies have also fallen over the past week, reducing the average P/E multiples somewhat. Asian companies focusing on commercial vehicle production include KoreaÆs Hyundai Motor and Kia Motors, IndonesiaÆs Ashok Leyland, MalaysiaÆs UMW Holdings and IndiaÆs Tata Motors.
Sinotruk will, however, be the only Hong Kong-listed company to focus purely on the manufacturing of heavy-duty trucks, and with a market share of about 20% and a comprehensive product line with more than 2,000 different models, it is viewed as a good way to gain exposure to the growth in ChinaÆs fixed asset investments (FAI). FAI has been on a steady increase since 2001 and reached Rmb7.8 trillion ($1.05 trillion) in the first nine months of this year, compared with Rmb10.9 trillion for the full year 2006.
Sinotruk is expected to record earnings growth of 52% this year from last yearÆs net profit of Rmb638 million, followed by 47% growth in 2008 and 16% in 2009, according to syndicate research. Aside from the increase in FAI, this should be supported by the expansion of ChinaÆs highways and expressways and a government crackdown on overloading of medium trucks, which together with the increasing practice of charging road tolls based on the weight of the load rather than the rated capacity of the vehicle, means it makes more sense to use heavy trucks.
To meet the rising demand, Sinotruk plans to expand its production capacity of heavy trucks to 110,000 units by 2010 from 70,000 units today. It will also relocate its engine manufacturing to new facilities in Hangzhou next year, which will allow it to lift its annual capacity to 140,000 engines from 100,000 at present.
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