Hong Kong IPOs

Two Chinese companies seek $541 million from HK listings

BMW dealer Yongda Auto is aiming to raise at least $306 million, while copper producer China Nonferrous Mining is seeking at least $235 million from the first listing of Africa-based mining assets in Hong Kong.
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The trouble in Greece is contributing to a difficult environment for Hong Kong IPOs
<div style="text-align: left;"> The trouble in Greece is contributing to a difficult environment for Hong Kong IPOs </div>

Concern about the fallout from the debt crisis in Greece and weaker economic data out of China led investors to take more risk off the table yesterday, pushing Hong Kong stocks lower for the eighth straight session. The Hang Seng index, which closed below 20,000 points for the first time since January 19, has now lost 7.4% since May 2.

It is hardly the most conducive environment in which to attempt an initial public offering, but with a fairly heavy pipeline of deals scheduled to come before early July and a lot of potential macro risk in the month of June, including more elections and sovereign debt refinancings in Europe, issuers that have done all the prep work don’t want to wait too long either.

And hence Hong Kong is seeing at least two sizeable deals hit the market this week. Together they are looking to raise at least $541 million and will provide an important test of the investor appetite.

Yesterday, China Yongda Automobile Services Holdings, the number one BMW dealer in China, kicked off the institutional roadshow and bookbuilding for an IPO that is aiming to raise between HK$2.37 billion and HK$3.37 billion ($306 million to $435 million). And today, copper miner China Nonferrous Mining Corp (CNMC) will follow with an offering of between HK$1.83 billion and HK$2.34 billion ($235 million to $314 million).

The CNMC offering is somewhat smaller than earlier indications that had suggested a deal size of at least $400 million, which may be a result of the recent pressure on commodity prices — and consequently on commodity stocks. Both companies also have commitments from cornerstone investors for a significant portion of their deals, although in the case of CNMC, perhaps not quite as large a portion it may have hoped as sources say many investors are hesitant to agree to a six-month lockup in the current environment. But one source said there is some anchor demand lined up as well and a “decent portion” of the deal will be covered at launch. Sources earlier said that the company wouldn’t launch a formal roadshow until it was comfortable with the level of demand from cornerstones or anchor investors.

Yongda Auto
Yongda Auto has signed up two cornerstone investors that will take between 34% and 41% of the deal, depending on the final price. Oman Investment Fund, a Middle Eastern sovereign wealth fund, will buy $30 million worth of shares, while Baring Private Equity will invest between $96 million and $120 million. The latter is supposedly kept flexible in order to comply with a Hong Kong listing rule that says the top three investors cannot buy more than 50% of an IPO.

The company is also hoping that its position as the top dealer of one of the country’s premium brands will attract other investors to the deal. Aside from BMWs, Yongda Auto also sells other popular international brands such as Audi, Jaguar, Land Rover, Cadillac, Toyota, Honda, Nissan, Volkswagen and Hyundai and according to research firm Roland Berger it ranked as the second largest dealership group in east China and the third largest in the country overall last year in terms of sales volumes of luxury and ultra-luxury passenger vehicles.

It currently has 66 sales outlets and has authorisation from the manufacturers to open another 25. In 2011, it sold more than 61,200 vehicles, which was almost double the 31,700 that it sold in 2009, demonstrating its rapid growth in recent years.

Chinese auto dealers have been a strong sector as Chinese consumers continue to increase their spending, and while auto sales have flattened out in terms the number of units sold, analysts note that the upgrade demand for successively more expensive models and brands has remained strong. However, Yongda Auto’s key Hong Kong-listed comparables all fell by between 5.5% and 6.6% yesterday.

Aside from adding to the overall negative sentiment in the market, the decline also ate into the valuation gap between them and Yongda Auto, making the latter look relatively less attractive.

However, one source said the order book was “building nicely” yesterday with about half the demand coming from long-only investors, and half from hedge funds.

Yongda Auto is aiming to sell 312.2 million shares, of which 90% are new. They are offered at a price between HK$7.60 and HK$10.80 and account for 20% of the post-issue share capital. The deal also comes with a 15% greenshoe that is made up of 50% new shares and 50% secondary shares. As usual for Hong Kong offerings, 10% of the shares are earmarked for retail investors while 90% will be targeted at institutional investors.

The price range translates into a 2012 price-to-earnings ratio of 8 times to 11.3 times on a pre-shoe basis, based on the joint bookrunner consensus earnings forecast. That compares with 9.2 times for China ZhengTong Auto Services Holdings, 9.8 times for Baoxin Auto Group and 10.8 times for Zhongsheng Group Holding, according to Bloomberg data.

At the time of listing, Yongda Auto will have a market cap between $1.5 billion and $2.2 billion, which makes it similar in size to ZhengTong but smaller than Baoxin, which has a market cap of about $2.6 billion. Both ZhengTong and Baoxin also focus primarily on the sale of BMWs. Baoxin raised $414 million from a Hong Kong IPO in December and is currently trading 5.8% below the offering price.

Zhongsheng, which is an authorised dealer for high-end brands Mercedes-Benz, Lexus and Audi, as well as for Toyota, Nissan and Honda, is the largest of the three comps with a market cap of about $3.2 billion.

The Yongda IPO is due to price after the US market closes on May 23 and the trading debut is scheduled for May 30. HSBC and UBS are joint global coordinators and bookrunners, and Bocom International is a bookrunner.

China Nonferrous
CNMC, which is part of state-owned China Nonferrous Mining Corp Group, is looking to sell 25% of its enlarged share capital in the form of 870 million new shares. They are offered in a range between HK$2.10 and HK$2.80, which translates into a 2012 P/E ratio of 5.95 times to 7.9 times, based on the joint bookrunner consensus.

At the bottom of the range, that puts it as a discount versus Jiangxi Copper, which is viewed as a key comp and which is currently trading at about 7 times. However, it remains to be seen whether that is enough given that CNMC is the first company to attempt a listing of African mining assets in Hong Kong — whatever that may mean in terms of additional perceived risk. CNMC currently has three producing mines as well as one copper smelter, all of which are located in Zambia. According to analysts, it produced 39.3 kilo tonnes of contained copper in concentrate last year, which made it the largest Chinese enterprise in terms of overseas copper production.

The fact that this is not a start-up business, but rather a well-established and profitable business (it made its initial investment into Zambia in the late 1990s) should appeal to investors assuming they can get their head around the African angle. One source said the deal has attracted early interest from global emerging market funds in Europe and, to some extent, the US that are familiar with investing in Africa.

CNMC has also signed up three cornerstone investors who will buy a combined $70 million worth of shares in the deal: Cosco Venus, an investment arm of state-owned China Ocean Shipping, will buy about $30 million worth of shares; CRCC China-Africa Construction, a subsidiary of Hong Kong-listed China Railway Construction Corp, will invest $10 million; and a Hong Kong-based investment company named Wise Pine Investment will buy another $30 million worth of the shares.

Another potential concern is the recent decline in copper prices, which may make investors more cautious about investing in a copper mining business. As one source said, “copper is typically a good indicator of people’s risk appetite and there was a significant shift in sentiment (for the worse) last week”.

The deal comes with a 15% greenshoe and the usual 90-10 split between the institutional and retail tranches. It is due to price a day after Yongda Auto, in other words after the US market closes on May 24. The listing is scheduled for May 31.

CICC, J.P. Morgan and UBS are joint bookrunners.

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