Zoomlion raises HK$1.68 billion from Hong Kong share sale

The Shenzhen-listed manufacturer of construction machinery prices its Hong Kong share offer at a 14.5% discount to its A-shares.

Changsha Zoomlion Heavy Industry Science and Technology Development, a leading Chinese manufacturer of construction machinery, has raised HK$13.03 billion ($1.68 billion) from its Hong Kong share sale, and will be the last major company to list in Hong Kong this year. The debut is scheduled for Thursday, which is the last full day of trading before the Christmas holidays as Friday is only a half-day in the Hong Kong market.

The company, which is already listed in Shenzhen, attracted decent demand despite deteriorating interest among investors for new share sales this close to year end. The Hang Seng Index has fallen 9% from its 2010 high of 24,964 points on November 8 and some recent newcomers to the market have struggled to perform, which has added to the reluctance to commit new money. Hedge funds, in particular, seem to have lost interest in new listings.

Chongqing Rural Commercial Bank (CRCB) fell close to 1% in its Hong Kong debut last Thursday -- the final day of bookbuilding for Zoomlion -- with observers noting that the early buying of the stock lacked conviction. They also felt that the share price may well have fallen more had it not been for the stabilisation done by the bookrunners. On Friday it edged up six HK cents to finish one cent above the IPO price at HK$5.26. CRCB raised $1.35 billion from its initial public offering.

Also on Friday, however, China Datang Corp Renewable Power fell 6% to HK$2.19 on its first day of trading after raising $644 million from its IPO. Another sign of the waning interest for new listings came on Monday last week when Datang Renewable’s larger competitor in the wind power sector, Huaneng Renewables Corp, called off its IPO due to “the change in market conditions and recent unexpected and excessive market volatility”. Huaneng had sought to raise between $965 million and $1.28 billion from its Hong Kong listing.

By offering a decent discount versus its Shenzhen-listed shares, and following extensive marketing by the joint bookrunners, Zoomlion was able to capture the interest of a number of anchor investors who helped create momentum and ensured the deal was fully covered on the first day. The final order book was also of good quality and contained few inflated orders, sources said.

At the end of the nine-day roadshow, the deal was about three times covered overall and had attracted about 250 institutional investors, primarily from Asia and the US. About two-thirds of the demand came from long-only accounts, while high-end retail investors, corporate accounts and hedge funds showed less interest. The retail tranche, which accounted for 5% of the total offer, was about eight times subscribed, meaning there will be no clawback.

The price was fixed at HK$14.98, after being offered in a range between HK$13.98 and HK$18.98. After taking account of the exchange rate, the final price translated into a 14.5% discount versus the company’s share price in Shenzhen. The latter gained 5.6% during the roadshow, which increased the relative attractiveness of the new Hong Kong shares. Meanwhile, investors who looked at the company from an absolute valuation perspective also found the numbers in favour of Zoomlion. Based on the joint bookrunner estimates, the offer price valued the company at 12.6 times its 2011 earnings, which compared with 19 times for A-share-listed Sany Heavy Industry.

This gap was all the more attractive as analysts generally view Zoomlion as the better company, with a stronger product portfolio and profitability and, according to a source, Zoomlion has also continuously beaten analysts’ earnings expectations in the past 10 years. The A-share price is widely viewed to be undervaluing the company and the broader shareholder base that comes with the Hong Kong listing is expected to result in a re-rating of the stock. Zoomlion is also the only company of its kind to be listed in Hong Kong, which would have made it interesting for investors who want exposure to the sector.

Based in Changsha in central China, the company makes a variety of heavy machinery for the construction industry, including concrete machinery, cranes, and environmental and sanitation machinery. In the listing prospectus, Zoomlion noted that China accounted for approximately 42.6% of global sales of construction machinery in 2009, making it the largest market for the product ahead of North America and Europe.

Zoomlion sold 869.58 million new shares plus a 15% greenshoe option. If the latter is exercised in full, the total deal size will increase to $1.9 billion and exceed shipbuilder China Rongsheng Heavy Industries to become the third largest listing in Hong Kong this year. Rongsheng raised $1.8 billion ahead of its trading debut last month. However, since Zoomlion is already listed in the A-share market, its share sale doesn’t technically count as an IPO, meaning Rongsheng looks set to remain the third largest IPO after AIA and Agricultural Bank of China.

Like most other recent deals, Zoomlion’s share sale was supported by four cornerstone investors. However, with a combined purchase of $82 million worth of shares, their investment only accounted for 4.9% of the base offer, which is quite modest compared with 15%-25% in a typical Hong Kong IPO. The cornerstones were: Hillhouse Capital Management, an Asia-focused fund management firm; Keywise Capital Management, a Hong Kong-based fund management firm; SIIC Investment Company, the investment arm of government-backed Shanghai Industrial Investment; and investment firm Zhong Ke Bright Trinity Enterprises.

China International Capital Corp, Goldman Sachs, J.P. Morgan and Morgan Stanley were joint bookrunners for the Hong Kong offering.

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