Xinchen China’s Hong Kong IPO draws strong retail appetite

The automotive engine manufacturer raises $90 million from its Hong Kong offering, while an upsized block trade in China Longyuan raises $135 million.
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Engine-maker Xinchen is a spin-off from Brilliance China
<div style="text-align: left;"> Engine-maker Xinchen is a spin-off from Brilliance China </div>

Xinchen China Power Holdings, a manufacturer of light-duty gasoline and diesel engines, has raised HK$698.9 million ($90 million) from its initial public offering in Hong Kong, after pricing slightly above the bottom of the indicative range.

As with other IPOs in the city this year, Xinchen China attracted an enthusiastic response from retail investors who shied away from the IPO market for most of last year.

The Hong Kong public tranche was more than 20 times covered, triggering a clawback that boosted this portion to account for 30% of the deal, from the initial plan for 10%, sources said yesterday. The institutional tranche, which now accounts for 70% of the deal, from 90%, was also multiple-times covered.

Xinchen China plans to use the proceeds from its IPO to fund the expansion of production capacity and the development of new products, as well as for research and development. Buying into the company is a way of getting leveraged exposure to the growth of domestic Chinese auto makers, one source has also said.

In another encouraging sign for the city’s IPO market, Termbray Petro-king Oilfield Services, an independent China-based provider of high-end oilfield services that raised $106 million from its Hong Kong offering late last month, had a bullish trading debut yesterday. The stock jumped to HK$4.16, or 26.8% above the offer price of HK$3.28, after the IPO priced just below the top of the indicative range.

The Hang Seng Index rose 1% yesterday after Asian stocks lost ground earlier this week, hurt by worries about China’s plans for tighter controls on its property sector. The index is up 0.5% so far this year.

The retail portion of Petro-king’s offering was 33 times covered, also triggering a clawback that boosted the tranche to 30% of the deal, from the initial plan for 10%, while the larger institutional tranche was more than 12 times covered.

The biggest deals in Hong Kong so far this year are Chinalco Mining Corporation International’s $399 million IPO in late January, followed by a $160 million offering by PanAsialum, a Chinese maker of iPad casings and other aluminium products.

In other capital market activity in Hong Kong, an undisclosed institutional shareholder in China Longyuan Power Group raised HK$1.04 billion ($135 million) from an upsized block sale on Tuesday night.

Xinchen China Power
Xinchen China, which was 42.5%-owned by Hong Kong-listed Brilliance China Automotive Holdings prior to the IPO, sold 313.4 million shares at HK$2.23 each, raising $90 million. The offer price translated into a 2013 price-to-earnings ratio of about 7 times. The stock is expected to start trading on March 13.

The deal was marketed in a price between HK$2.20 and HK$2.80 each, which could have allowed it to raise as much as $113 million, and which valued the company at a 2013 P/E multiple of between 6.8 times and 8.6 times.

The base deal size represented 25% of Xinchen China and reduces Brilliance China’s stake to about 31.9%.

The deal comes with a 15% greenshoe option that if exercised in full could increase the deal size to as much as about $104 million, based on the final price. All shares are new.

There were no cornerstone investors for this deal, but some good orders came in on the first day, according to one source. The deal ended up having a strong book, and it attracted a good mix of orders from long-only investors, shareholders of Brilliance China and hedge funds, the person said yesterday.

The company has no direct comparables, but investors likely looked at companies such as Weichai Power, a Hong Kong-listed manufacturer of high-speed diesel engines in China. Weichai Power is currently trading at a 2013 P/E multiple of around 11.2 times, according to Bloomberg data.

Xinchen China said in a statement posted to the stock exchange that it is one of the leading manufacturers of independent branded engines for passenger cars and light commercial vehicles in China, in terms of sales volume. It develops and sells both light-duty petrol and diesel engines, and focuses on engines with a high performance-to-price ratio, as well as low fuel consumption, emissions and noise, for the mid- to low-end auto market.

Bank of America Merrill Lynch was initially mandated as the sole bookrunner, but Deutsche Bank was later added to the line-up. The two banks were joint global coordinators and bookrunners for the deal. BoA Merrill remained the sole sponsor.

China Longyuan Power
The block sale, which initially comprised 120 million shares, was marketed for a price between HK$6.91 and HK$7.02 each, set to raise about $107 million to $109 million. The price range represented a discount of between 2.5% and 4% to Tuesday’s close of HK$7.2.

But due to strong demand, the deal was upsized by 25% to 150 million shares and priced at HK$6.96, the mid-point of the range, a source said yesterday. It attracted strong demand mainly from Asian investors, including long-only investors and hedge funds, the source said, adding that there were 70 lines in the book.

After the transaction, the stock fell 2.9% yesterday to HK$6.99, staying above the offer price. The stock has climbed about 30% since the start of the year.

China Longyuan designs, develops, constructs, manages and operates wind farms. It also runs other projects, such as thermal power, solar power, tidal power, biomass power and geothermal power, according to the company’s website. Apart from the installed capacity and business performance, the company also takes the lead in several new emerging areas in China, such as the development of the overseas market, offshore wind power and wind power at high altitudes and low wind speeds, it says. By the end of 2011, its wind power capacity amounted to 63GW.

Investors have previously underweighted the sector, but they are chasing it now because clean-energy and environmental protection is a big theme for China this year, the source explained.

The deal was launched after the market close on Tuesday, and the books were closed at around 9.30pm Hong Kong time.

UBS was the sole bookrunner for the deal.

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