Yitai Coal raises $902 million from Hong Kong IPO

Inner Mongolia’s Yitai Coal raised HK$7 billion ($902 million) on Friday from the second-biggest initial public offering in Hong Kong this year. The company, which is already listed in Shanghai, fixed the price at the bottom of the indicative range to close the largest IPO since Haitong Securities’ $1.67 billion offering in April.

Given the tough market for IPOs in the first half of the year, Yitai Coal took the approach of securing a sizable cornerstone tranche — 43% of the deal in this case — to ensure the success of the offering.

The coal miner sold 162.7 million new H-shares at HK$43 each, which was the bottom of the marketed range between HK$43 and HK$53. The deal represented about 10% of the company’s enlarged share capital. Listing is scheduled for July 12.

The final price offers a discount of 4.3% against the $5.75 closing price for Yitai Coal’s dollar-denominated B-shares on Friday. This was the biggest discount available under guidelines from Chinese regulators, which state that an 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. Syndicate bankers have been doing investor education since May 28.

As with other recent deals, retail appetite was scarce amid uncertain market conditions. As the 10% Hong Kong retail offering was undersubscribed, more shares were clawed back to the institutional tranche, and the retail portion now takes up about 0.74% of the deal and the institutional portion accounts for the remaining 99.26%, sources said. Investors who participated in the deal were mainly corporate, strategic and QDII investors from Asia, another source said.

In another development, China Yongda Automobile Services Holdings, which closed books on Thursday, has raised HK$1.67 billion after marketing the deal at a fixed price of HK$6.60 a share. The deal also saw its 10% retail tranche undersubscribed, with roughly 0.3% of the deal now going to retail investors and the remaining 99.7% going to institutional investors, according to a source.

Yitai Coal signed up seven cornerstone investors that had committed a combined amount of about $388 million worth of shares, or 43% of the deal. They are manufacturer Baosteel, power producer Datang International, Inner Mongolia Man Shi Investment Group, King Link Holding, Lion Fund Rainbow No. 1 Investment Mandate, Ordos Vanzip Project Construction Company and Reignwood International Investment, according to a source.

Reflecting challenging markets, Yitai Coal, a Chinese private enterprise, had decided to sell 10% of its enlarged share capital, compared to earlier plans to offer 15%.

Meanwhile, according to the prospectus, from June 11 to 13, Yitai Group, the controlling shareholder of Yitai Coal, bought about 1 million of the coal producer’s B-shares on the Shanghai stock exchange. Yitai Group is entitled to continue to buy the B-shares in the six months starting from June 11, and it has committed to spend up to $512.4 million for that purpose, it said.

Since the share buyback in June, the B-shares have risen about 15%. They have also climbed nearly 13% since investor education started in late May.

The final price translates into a 2012 price-to-earnings ratio of 6.7 times, based on the bookrunners’ consensus, and that puts Yitai Coal at a discount to Shenhua Coal Energy, which is viewed as the closest comparable and currently trades at about 9 times.

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 is home to the largest proven coal reserves in China.

BOC International and CICC were the joint sponsors for the deal, and joint bookrunners with Bank of America Merrill Lynch, BNP Paribas, China Merchants Securities International, Credit Suisse, ICBC International, Macquarie and UBS.

As for Yondga, in its earlier version of the IPO it went out with a price range of HK$7.60 to HK$10.80, which implied a deal size of $306 million to $435 million. But the price and size of the offering had to be modified as its key comparables had lost some of their value since Yongda started bookbuilding the first time around on May 14.

Yongda is the number one BMW dealer in China, according to its prospectus.

Yondga has also signed up two cornerstone investors who have committed to take up 48.4% of the IPO. They are Baring Private Equity Asia, which has promised to buy $80 million worth of shares, and a Hong Kong-based investment holding company controlled by Prax Capital, a private equity firm dedicated to China-focused investments. Prax has committed to buy $24 million worth of shares.

There were about 25 accounts in the book and Asia was the most significant region for demand followed by Europe, the source said. The person added that the deal attracted demand from high-net worth, some long-only, some hedge fund and private equity investors.

The trading debut is scheduled for July 12. HSBC and UBS are global coordinators, as well as joint bookrunners together with Bocom International.