Yitai Coal targets $900 million from Hong Kong IPO

Inner Mongolia Yitai Coal will kick off the bookbuilding for its Hong Kong initial public offering, which will likely be the last IPO to launch in the first half. Syndicate bankers have been doing investor education since May 28 and sources say the structure of the deal will be similar to several other recent offerings in that it will rely heavily on cornerstones and anchor investors

However, the key reason why the Chinese coal producer has been treading water for the past few weeks and why it is going ahead now is that its Shanghai-listed B-shares have finally risen to a level that the IPO price can be set at a discount to the current market price. To sell new shares at a premium would be tough in any market environment and against the current market backdrop it would be virtually impossible — especially since Yitai Coal already has a number of international institutions on its shareholder roster.

In a further not to the challenging markets, the company, a Chinese private enterprise, has also decided to sell only 10% of its enlarged share capital, compared to earlier plans to offer 15%. This will reduce the deal size somewhat, although one source said the company is still targeting between HK$6.99 billion and HK$8.62 billion ($900 million to $1.1 billion), which will make it the second largest new listing in Hong Kong this year after Haitong Securities.

The company will be offering approximately 162.7 million new H-shares at a price between HK$43 and HK$53. The bottom of the price range is equal to the floor price of $5.53 (adjusted for the exchange rate) and translates into a discount of 5.3% versus the $5.84 closing price for Yitai Coal’s dollar-denominated B-shares yesterday. The B-shares have risen 14.5% since the start of investor education and are up 16.8% from the lows on June 11.

As per the guidelines from Chinese regulators, the H-share IPO cannot price below the 20-day moving average of the B-shares, determined on the day the IPO received regulatory approval. In the case of Yitai Coal, this was on April 11, which meant the floor price quickly became an issue when global equity markets sold off in May.

When bankers started to test the demand for the deal, the B-shares were quoted at $5.10, which put it at a 7.8% discount to the floor price and made the plans to launch a Hong Kong share offering seem somewhat ambitious. But the recovery in the B-share price suggests that bankers made the right call to start the process and be ready to go if the market turned. Yitai Coal has been trying to obtain a Hong Kong listing approval from its Chinese regulators for a couple of years and was clearly keen to get the deal on the road once it finally came through.

To increase the likelihood of a successful deal, Yitai Coal has signed up seven cornerstone investors that will buy a combined $389 million worth of shares, or about 43% of the deal at the bottom of the price range. According to a source, the two largest cornerstones are steel manufacturer Baosteel and power producer Datang International. The remaining five are also Chinese although they appear to be financial investors as opposed to companies.

Bankers also have commitments from anchor investors, although as of last night it was unclear how much they would buy. And, in any case, their orders aren’t 100% until they are actually submitted when the order books open this morning. The source said, however, that despite the size the bookrunners appear to be “pretty comfortable” that the deal will get done.

The bottom of the price range translates into a 2012 price-to-earnings ratio of 6.7 times pre-shoe and 6.8 times if the 15% greenshoe is exercised in full.

This puts Yitai Coal at a discount to Shenhua Coal Energy, which is viewed as the closest comparable and currently trades at about 8.8 times this year’s earnings. However, two other Hong Kong-listed coal producers, China Coal Energy and Yangzhou Coal Mining, can be bought at cheaper valuations as the sector has taken a beating in recent months on the back of sliding coal prices. According to Bloomberg data, China Coal is quoted at a 2012 P/E ratio of 6.6 times, while Yanzhou Coal is at 6.0 times.

The timetable is also somewhat compressed, probably to limit the market risk as much as possible, with the 10% Hong Kong retail offering kicking off already on Friday. Accounting for the fact that Monday is a holiday in Hong Kong, the deal will close on July 5 with the pricing expected at the end of US trading that day. The listing is scheduled for July 12.

According to a preliminary prospectus published on the Hong Kong stock exchange website, Yitai Coal is the biggest coal miner in Inner Mongolia and one of the largest in China based on 2011 revenues. Inner Mongolia is a region that is known for its high-quality coal and that is home to the largest proven coal reserves among the Chinese provinces.

Yitai Coal produces primarily thermal coal for use in power plants and currently has seven operating mines and two mines under development. It is also planning to buy an additional five mines from its parent company following the IPO, partly to increase the scale of its business, partly to reduce the potential competition between Yitai Group and the listed entity. The acquisition will set it back approximately Rmb8.45 billion ($1.3 billion) and will increase its marketable coal reserves to about 1.24 billion tonnes from 1.15 billion tonnes. Based on its 2011 numbers, the additional five mines would have boosted its annual production volume to 47.8 million tonnes from 35.1 million tonnes and its revenues to Rmb27.0 billion from Rmb16.5 billion.

The company is about 60.1% owned by its parent, Yitai Group, and has a market capitalisation of about $8 billion.

As reported earlier, the IPO is being arranged by Bank of America Merrill Lynch, BNP Paribas, BOC International, CICC, Macquarie and UBS. However, numerous other banks have been circling the deal for the past couple of months and sources said yesterday that three other banks — China Merchants Securities, Credit Suisse and ICBC International — have been added to the line-up.