Suchuang Gas priced its 200 million-share Hong Kong initial public offering at the bottom of its price range on Friday, raising HK$416 million ($53.6 million) in the process.
Sources close to the deal reported that the institutional order book was covered but only at the very bottom of the range of HK$2.08 per share, with listing scheduled for March 11.
Lack of investor interest was not that surprising after the company, the dominant supplier of piped natural gas in the city of Taicang on the Yangtze River Delta, formally launched the deal on a relatively expensive valuation of 9.3 to 13 times estimated 2015 earnings. At the top end of the price range, the deal was pitched just below the top end of syndicate analysts' fair value estimates, which spanned a price-earnings range of 10 to 15 times forward earnings.
This, in turn, represented a 15% to 40% discount to the seven-year average trading levels of the big four city gas distributors -- China Gas, ENN Energy Holdings, China Resources Gas, and Towngas China.
However, Suchuang is much smaller than the big four and is based in just one city, whereas China Gas has 184 city gas projects.
On final pricing, the deal offers a 7% IPO discount relative to the bottom end of the fair value range.
Secondary market hopes
On the positive side, Suchuang may witness a much better secondary market performance, as the whole sector appears to be on the turn after the Chinese government reversed its previous natural gas pricing policy last weekend.
It announced a 5% price cut in blended non-residential gas prices, effective April 1. Previously, it had intended to implement a 15% price rise in the autumn.
The move came as a result of falling oil prices, which progressively made natural gas more expensive compared with other fuels. This was never the government's intention given its plans to persuade companies to switch from fossil fuels to natural gas, which creates less pollution.
The share prices of Chinese city gas operators responded to the last price hike by selling off heavily last summer. They fell on average by about 30% before bottoming out in December.
This year they have begun to turn, with analysts suggesting that the government may cut gas prices to make the sector cost competitive again.
As a result, China Gas Holdings is currently up 4.7% so far this year and trading on a forward price-earnings ratio of 19.69 times earnings. ENN Energy Holdings, meanwhile, is up 6.2% year-to-date and is trading on a forward valuation of 15 times 2015 earnings.
Both have outperformed the Hang Seng China Enterprises Index, which is down 5.2% so far this year.
Pre greenshoe, Suchuang Gas will have a 25% freefloat.
About 30% of the IPO proceeds are being allocated for potential mergers and acquisitions. The remaining proceeds are being used to fund the company's annual Rmb200 million capital expenditure. This includes acquiring three Compressed Natural Gas and Liquefied Natural Gas re-fuelling stations from a related company owned by the owners' daughters and constructing nine combined CNG and LNG re-fuelling stations.
BNP Paribas is sole sponsor for the IPO, with Haitong International as joint bookrunner.