Tiangong triggers buying spree

The Chinese special steel manufacturer draws more than $15 billion worth of orders for its $105 million IPO.
Chinese special steel manufacturer Tiangong International Company has priced its Hong Kong initial public offering at the top of the range for a total deal size of HK$826.8 million ($105.7 million), after receiving overwhelming demand from the market.

The privately owned special steel manufacturer produces and sells high-speed steel (HSS), die steel and cutting tools. High speed steel and die steel are used for specific industrial applications such as the manufacturing of automobiles, machinery and cutting tools. As these types of steel tolerate higher pressure and temperatures and than regular steel, they are more wear resistant.

According to a source, the institutional book was approximately 100 times covered pre-clawback, drawing more than $9 billion worth of orders. The 10% retail portion was around 600 times covered, tying up more than $6 billion in cash. The strong retail demand triggered a full clawback, which increased the size of this tranche to 50% of the total deal.

ôAs the largest company of its kind, Tiangong accounts for more than one-third of the market in China. It runs a unique business that has hardly any close comparables in Asia,ö says one observer, trying to explain why investors flocked to the deal.

Tiangong is the largest manufacturer of HSS in China by volume, with a market share of 44.7%. According to Special Steel Enterprise Association of China, it produced more than double the volume of its nearest Chinese competitor last year. In 2006, it was also the largest HSS cutting tools manufacturer by revenue, as recognised by China Machine Tool & Tool BuildersÆ Association.

The company fixed the price of its IPO at HK$6.36, which marked the top of an indicative range starting from HK$5.40. The price values the company at 16.1 times its 2007 earnings post-greenshoe.

The BNP Paribas-led offering comprised 130 million shares, or 32.5% of its enlarged share capital, of which 77% were new shares and 23% existing shares. According to the source, the selling shareholder was American Insurance Group which owns shares in the company through numerous funds and subsidiaries.

Although the direct comparables are few, Nachi-Fujikoshi in Japan and Sandvik in Sweden may help to shed some light on the valuation as some of their products overlap.

Nachi-Fujikoshi manufactures bearings, machine tools, industrial robots as well as oil and air pressure equipment. It traded at 19 times its 2007 earnings by the end of last week, according to Bloomberg data. Stockholm-listed Sandvik, which develops, produces and sells special alloys, cutting tools and mining and construction equipment, trades at a projected 2007 price-to-earnings multiple of 18.4. Nachi-Fujikoshi and Sandvik are both larger than Tiangong.

Tiangong recorded an 18% increase in net profit from Rmb49.7 million ($6.6 million) in 2004 to Rmb58.9 million in 2005, and a further 64% year-on-year growth to Rmb96.6 million in 2006. In the listing prospectus the company estimates that its profit will reach at least Rmb162 million in 2007, representing 72% growth year-on-year. According to the prospectus, it intends to pay 30% of its net profit as dividends after it goes public.

In the first quarter the manufacturer derived 48.2%, 38.8% and 13% of its total revenue from sales of HSS, cutting tools and die steel, respectively. It sells its HSS and die steel primarily to domestic manufacturers.

The company will use most of the net proceeds to invest in HSS production equipment, cutting tools and die steel products of larger specification and higher grade. It will also spend roughly 28% of the money raised to repay a portion of its bank loans. The rest will go towards general working capital. BNP Paribas was the sole bookrunner.

Before the IPO, chairman Zhu Xiaokun and his wife Yu Yumei held 70% of the company. AIG, which converted an exchangeable bond into shares at HK$2.61 in June, held 30% of the company. After the listing, their stakes will fall to 52.5% and 15% respectively, or to 50.06% and 14.3% if the greenshoe is exercised in full.

Tiangong will start trading on Hong KongÆs main board on July 26.
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