China’s Hilong Holding, which provides oilfield equipment and services, is taking advantage of high oil prices and fears of further disruption to supplies from North Africa and the Middle East to launch an initial public offer in Hong Kong.
The Beijing-based company plans to raise HK$1.48 billion ($190 million) from the IPO and kicked off bookbuilding on Monday with the backing of a $10 million cornerstone investment by Larry Yung, the former chairman of Citic Pacific. The veteran energy and natural resources investor has agreed to a six-month lock-up on his investment, according to sources.
It is not a big deal, but will serve as a useful barometer of investor sentiment towards China’s oil industry, which appears to be vulnerable to the current disruption due to the country’s shortage of strategic reserves.
China transformed itself from a net oil exporter during the Gulf war (1990-1991) to the world’s second-largest oil importer, behind only the US, in just two decades. Even so, the nation’s oil companies still struggle to meet China’s demand for energy, which is growing even faster than its oil imports.
Hilong is the largest maker of drill pipes and coating materials in China, and the second-largest in the world. The company is also active in oilfield services, an area that has driven the company’s revenues in recent years, according to a preliminary IPO prospectus.
The company’s main customers include China’s top oil companies, such as Cnooc, PetroChina and Sinopec. It is also a qualified supplier to some large international oil and gas companies, including Schlumberger, Gazprom and Weatherford. It has overseas offices in Russia, the United Arab Emirates and Canada.
The company is offering 25% of its enlarged share capital, or 400 million shares, all primary, at HK$2.50 to HK$3.70. That suggests the company could raise between HK$1 billion and HK$1.48 billion.
Based on Hilong’s 2011 forecast earnings, the offering prices translate into a price-to-earnings (P/E) ratio of between 8.8 times and 13 times. The higher end of the P/E range pitches the company at a premium compared with its domestic competitors, Shandong Molong Petroleum Machinery and Anhui Tianda Oil Pipe, which are quoted at around 7 times to 9 times 2011 P/E in their Hong Kong trading, according to bankers.
The deal comes with a 15% greenshoe option that, if fully exercised, would allow the company to raise up to HK$1.7 billion by issuing an additional 60 million shares.
The shares will be priced on March 16 and a trading debut is scheduled for March 24. Morgan Stanley and Standard Chartered are managing the deal jointly.
Hilong will use the proceeds from the transaction to fund the expansion of its oilfield services and increase its output of coating materials. It will also upgrade drill-pipe production lines and repay bank loans, according to the company.
Chinese firms are likely to remain active in the domestic and overseas IPO markets this year, even though the seemingly irrational IPO frenzy in 2010 has drawn criticism from China’s annual National People’s Congress, with some participants arguing that Chinese companies have raised far more than they need in the equity markets.
Companies in China could raise more than Rmb400 billion ($61 billion) this year from initial public offerings, and financial services providers, information technology companies and industrial product manufacturers are likely to lead the deals, PricewaterhouseCoopers (PwC) has said.
Grant Thornton, a US accounting and management consulting firm, has found in a recent survey that Chinese companies prefer listing to borrowing, which sets them apart from their global counterparts. Around 24% of Chinese companies interviewed by the US consultants said they are planning to sell shares to fund their development. By contrast, of all the companies surveyed globally, only 5% ticked public listings as their preferred form of financing.
