XCMG Construction Machinery has decided not to go ahead with its Hong Kong IPO today as initially planned, according to sources. The company, which had already delayed the launch of its institutional bookbuilding by a week, told investors on Friday that it would proceed with a smaller offering today.
The terms were never finalised, but sources said, the aim was to raise approximately $1 billion to $1.2 billion – down from an earlier target of $1.5 billion to $2 billion worth of shares. The size of the deal would also be reduced from 20% of the enlarged share capital to about 15%.
But, over the weekend, the company changed course yet again and decided not to proceed. Whether the deal is still just being postponed, or has been withdrawn is not clear.
Some sources cited the difficult market environment as a key reason why the company has chosen not to launch today, although nothing has really changed since early Friday evening when the deal was still a go. In fact, US markets traded up on Friday, with the Dow Jones index finishing 0.35% higher and the Nasdaq Composite adding 1.1%.
Instead, it seems the company had counted on a number of domestic banks, which it added to its line-up of bookrunners last week, to hard underwrite a portion of the deal. In other words, the banks would commit to buy some of the shares themselves in case of weak demand from investors. Hard underwriting is an unusual practice on Hong Kong IPOs and, according to media reports, some of these banks turned out not to be willing to do so.
Some bankers say that domestic Chinese banks have been quite aggressive recently in offering to hard underwrite Hong Kong IPOs in order to get mandated on the deals, only to withdraw their promise as the deals get closer to launch. It is possible that XCMG simply called them on their bluff.
The company last week added six new bookrunners to the team that is working on taking it public, taking the total line-up to an unprecedented 12 banks. The newcomers are: ABC International, BOC International, Bocom International, Essence Securities, Goldman Sachs and ICBC International.
BNP Paribas, CICC, Credit Suisse, HSBC, Macquarie and Morgan Stanley were already on the deal.
The main surprise among the newcomers was Goldman Sachs. As an international bank, it is unlikely to have agreed to hard underwrite the deal, and it is questionable what it aims to get out of a transaction that has 11 other bookrunners. Especially since fees and league table credits are bound to get diluted down to very small numbers as they are split between the banks.
It is also somewhat curious that the company seems to believe that the success of an IPO is somehow tied to how many banks are working on the deal.
Clearly XCMG is up against a difficult market environment. On Thursday last week, its larger rival Sany Heavy Industry postponed its $3.3 billion IPO after just three days of bookbuilding, citing the extreme market volatility. This came after the company had already decided to delay the retail portion of the offering, originally due to open on Wednesday last week, because it needed more time to meet investors.
Investors were told that Sany’s management will complete the international roadshow as planned “with a view to relaunching the transaction, on an accelerated basis, once conditions in the market have improved”.
Earlier in the week, small-cap Chinese restaurant chain Xiao Nan Guo Restaurants Holdings cancelled its $71 million to $95 million IPO, again citing market conditions.
And in a further sign of the weak investor interest for market newcomers, Hongguo International dropped 14.8% below its IPO price when it started trading on Friday. The Chinese shoe manufacturer and retailer raised $208 million from an IPO arranged by Citi and DBS.
The Hang Seng Index fell 9.2% last week to Friday’s close of 17,668 point. This is the first time in more than two years that the index traded below 20,000 points for any length of time.
Because it is already listed in Shanghai, XCMG also has to be mindful of its A-share price. Since international investors have limited access to the A-share market, the A-share price is not a key comparable, but XCMG still cannot price its offering at too wide a discount to its Shanghai-listed stock. That becomes an issue once the H-share price range is fixed.
According to sources last week, the price range for XCMG’s Hong Kong IPO was to range between a 15% discount and a 5% premium to the 20-day volume-weighted average price (VWAP).
XCMG’s A-share price fell 3.3% last week and has lost 9.5% since the start of investor education three weeks ago. Meanwhile, Changsha Zoomlion Heavy Industry, which is viewed as the key Hong Kong-listed comparable, has fallen 39% in the past three weeks, significantly reducing its valuation multiples. This too makes it difficult for XCMG (and Sany) to price its IPO at a level that investors view as attractive.
The low end of the price range was expected to value XCMG at about seven times next year’s earnings, which compares with about 5.5 times for Zoomlion.