Zhengzhou Coal raises $296 million from Hong Kong IPO

Demand for the Chinese mining machinery company is lacklustre and the deal crosses the line only after at least one bookrunner steps in to provide support.
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Zhengzhou Coal is China’s biggest maker of hydraulic roof supports
<div style="text-align: left;"> Zhengzhou Coal is China’s biggest maker of hydraulic roof supports </div>

Shanghai-listed Zhengzhou Coal Mining Machinery has raised HK$2.3 billion ($296 million) from its initial public offering in Hong Kong, after fixing the price at the bottom of the range late on Wednesday.

As with other recent deals, retail investors showed little interest in the offering and, as a result, the 10% retail portion of the deal was cut to 2%, while the institutional portion was increased to 98% from 90%.

Even so, one of the bookrunners for the IPO had to step in to buy a small portion of the deal to cover a demand shortfall. According to a source, the deal was technically covered, although not enough to also lay out the 15% greenshoe. However, many of the orders in the book turned out to be inflated and rather than giving investors more shares than they actually wanted — or scrapping the deal altogether — UBS bought approximately $5 million worth of stock.

There were suggestions that one or two of the other bookrunners had done the same, although this was not confirmed and no further details of how the shares were distributed were available yesterday. However, any take-up of shares by the bookrunners will have to be disclosed in the final prospectus, which will be published before the listing on December 5.

It is rare to see bookrunners in a Hong Kong IPO support a deal in this way. While $5 million accounts for less than 2% of the deal, the fact that they bought shares at all is likely to reignite the debate about hard-underwritten deals that have been requested by some Chinese issuers in the past year.

Normally, when an IPO isn’t fully subscribed, the bookrunners will cut the price and sometimes also the number of shares on offer to match the actual demand and then relaunch the deal. However, this wasn’t possible in the case of Zhengzhou Coal since the final price was already fixed at the maximum 15% discount to the 20-day average close of the company’s Shanghai-listed shares. The company was also just meeting the minimum free-float requirement, leaving the bookrunners with no flexibility on either price or size.

Zhengzhou Coal had already been granted some additional leeway by the Chinese regulators with regard to the discount after feedback from investors during the pre-marketing in mid-September suggested that the usual 10% discount to the A-share wasn’t attractive enough. So, the company went back to the regulators to ask for an increase to 15% from 10%. The request was approved before the deal launched on November 21.

During this time, the deal size also shrunk from an initial plan to raise up to $500 million.

As it were, Zhengzhou Coal sold 221.122 million new H-shares at a price of HK$10.38 each, raising $296 million. The shares were marketed in a range between HK$10.38 and HK$12.28.

The deal size represents 13.6% of the enlarged share capital. As mentioned, the bookrunners didn’t allocate a greenshoe. At the time of the launch, the deal included a 15% shoe that could have resulted in the company selling an additional 33.17 million shares in case of demand.

The majority of the institutional demand came from Asia — mostly Chinese investors — and there were only just over 30 accounts in the book, a second source said.

The final price values the company at a 2013 price-to-earnings ratio of 6.5 times, according to the same source.

Zhengzhou Coal is the first company in its specialist industry to list in Hong Kong — it is a leading maker of coal mining and excavating equipment as well as China’s biggest maker of hydraulic roof supports. However, investors did compare it to Chinese machinery companies Sany and Zoomlion, as well as international peers such as Caterpillar.

Sany is trading at a 2013 P/E multiple of about 9 times, while Zoomlion is quoted at 6.3 times and Caterpillar at around 9.8 times, according to Bloomberg data.

Zhengzhou Coal’s Shanghai-listed stock fell 0.1% yesterday to Rmb8.81 (HK$10.87). It has declined 15.7% since pre-marketing started on September 18, taking the year-to-date fall to nearly 30%. The Shanghai Stock Exchange Composite Index is down about 10.7% so far in 2012.

Zhengzhou Coal priced the deal on Wednesday night after a management roadshow and bookbuilding that started on November 21. The listing is scheduled for December 5.

As reported earlier, Citic Securities, Deutsche Bank, J.P. Morgan and UBS were joint bookrunners. However, ICBC International was added to the list on Wednesday after it was able to re-confirm in full a key order that it had brought into the deal. ICBCI was previously appointed a joint lead manager. In addition to its other roles, UBS was also a joint sponsor of the offering together with J.P. Morgan.

With only about a month left for the year, a number of offerings have hit the Hong Kong market in recent weeks, including PICC Group’s IPO of at least $3 billion, which is set to price this morning. Banks working on the deal have told investors that the price will be fixed in the bottom quarter of the range.

Meanwhile, Future Land Development finished 1.4% higher in its trading debut yesterday. The Chinese property developer raised $265 million from its IPO after fixing the price at the bottom of the range. The retail portion of the deal was reduced to 2.5% from 10%, due to weak demand from retail investors, and the leftover shares were reallocated to institutional investors, increasing the institutional tranche to 97.5% from 90%.

So far in 2012, the total raised from initial public offerings in Hong Kong has amounted to just $6.9 billion, a drop of about 77% from the $29.8 billion raised during the same period last year, according to Dealogic.

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