CRCC High-Tech Equipment, the track maintenance equipment manufacturing unit of state-owned China Railway Construction Corporation (CRCC), filed an application for an initial public offering on the Hong Kong Stock Exchange on Friday.
The company is aiming to raise at least $300 million from the IPO, according to a source familiar with the matter. Senior management of the company hopes to complete the IPO process by the end of the year, the source added.
A target listing in the fourth quarter could put CRCC High-Tech in the company of far bigger listing hopefuls, including CICC, China Reinsurance and China Huarong Asset Management, during what is considered the busiest season for Hong Kong floats.
Chinese investment bank CICC is targeting $1 billion from a Hong Kong listing by the end of the year, while China Reinsurance and China Huarong Asset Management aim to raise $2 billion and $3 billion from their respective IPOs.
Losing steam
Market sentiment towards railway-related stocks has been relatively weak entering into the second half as the excitement that greeted the merger of China’s two largest train manufacturers fades.
CRRC, the entity formed by the merger of CSR and CNR, has seen its A-shares fall more than 50% in two months since completion of the $26 billion merger on 7 June. The plummeting value of CRRC's A-shares and a simultaneous 33% plunge in its H-shares have wiped nearly Rmb400 billion ($64.4 billion) off the company’s market value.
Railway signal developer China Railway Signal & Communication’s disappointing market debut on Friday was the latest example of weak investor sentiment towards railway stocks. The state-owned enterprise was barely able to hold onto its offer price despite a bottom-end pricing of the IPO. The shares traded up 0.3% to close at HK$6.32 Friday, underperforming the Hang Seng Index’s 0.73% gain.
China Railway Signal had high hopes for its debut after lining up $971 million of cornerstone commitments for the $1.4 billion IPO before the roadshow began. It eventually had to price the shares at the bottom end of the HK$6.3 - $8.0 price range when the public declined to follow the cornerstone investors' lead, leaving its retail tranche only half covered at the close of the bookbuild.
By barreling ahead with the listing application on August 7, CRCC High-Tech appears sanguine that market sentiment will perk up before February 7, the last day it can start a formal bookbuild for the IPO. A successful listing application is valid for six months from the time of filing, according to HKEx rules.
On track
CRCC High-Tech manufactures large machines that are used to construct or repair railway lines. According to its preliminary prospectus, it was China’s biggest manufacturer of large railway track maintenance machines in terms of total sales with an 83.1% market share last year.
Management and maintenance of China’s domestic railway lines are primarily conducted by China Railway Corporation. As such, CRCC High-Tech generated 90.7% of its revenue from the national railway operator in 2014, while the remainder came from local railway operators and construction companies.
Net profit last year grew a stellar 55.2% to Rmb436 million on a year-on-year basis, thanks to a sharp reduction in administrative expenses and positive investment gains. Total revenue increased 10.6% and 9.7% in 2013 and 2014 respectively.
The company is aiming to ride on China’s railway industry growth as the country plans to allocate Rmb800 billion in the hopes of extending its rail network from 112,000 kilometers to 120,000 kilometers this year. Analysts said the fact that railway investment is closely related to the country’s GDP growth means the government is unlikely to pull back on the railway push in the coming years.
China’s large railway track maintenance industry is expected to grow at a compounded annual growth rate of 9.3% between 2014 and 2019, according to China Insights Consultancy. Total value of the industry is tipped to grow from Rmb3.4 billion in 2014 to Rmb5.3 billion by the end of 2019.
World express
The company appears to be preparing for expansion into foreign countries through the Hong Kong float. It plans to deploy some of the proceeds from the IPO to establish an international railway maintenance research center to promote cooperation with foreign railway maintenance companies, according to its preliminary prospectus.
It will first look to enter foreign markets through setting up offshore manufacturing plants, joint ventures or through mergers and acquisitions.
Currently, international railway maintenance companies such as Plasser & Theurer, Harsco and Speno all operate in China through cooperation with mainland companies.
Investors will not doubt take comfort in CRCC High-Tech's debt free status. The company’s gearing ratio dropped from 67% in 2012 to 0% last year, indicating that it is not carrying any interest-baring borrowings.
CRCC's schedule
The spin off will be part of CRCC’s initiatives to improve its capital structure and enhance the value of its assets.
The valuation of the machinery manufacturing industry, CRCC High-Tech's industrial category, has been higher than the construction industry, the subsidiary said in its filing. As a result, the company believes it can secure a higher valuation on the international market.
In its 2014 annual report, CRCC said the spin off [of CRCC High Tech] is intended to enhance the comprehensive competitiveness of the professional machinery manufacturing sector and promote the strategic improvement of the group.
Formerly known as Kunming China Railway Large Maintenance Machinery, CRCC High-Tech contributed to about 4.2% of its parent’s net profit last year. The unit has an implied market value of around $1.43 billion, based on its parent's current market capitalisation of Rmb212 billion.
Apart from the spinoff, CRCC has also raised Rmb9.8 billion through a private placement of A-shares in July as it moves to improve its capital structure. The placement in Shanghai increased CRCC’s total issued share capital by about 10% to 13.6 billion shares, according to Moody’s.
Since its Hong Kong listing in 2008, the company's shares mostly traded below the HK$10.7 IPO price until March this year, when the A-share frenzy sent the stock up as high as HK$16.5.
CRCC has set the wheels in motion and is undoubtedly hoping the initiatives support its share price after a prolonged period of lackluster performance. CRCC shares ended at HK$11.46 on Friday.
CRCC High-Tech will be the first spinoff listing from a state-owned enterprise in Hong Kong since Sinopec hived off its oilfield engineering unit Sinopec Engineering for a HK$13.9 billion ($1.8 billion) IPO in May 2013.
Citic CLSA Securities is the sole sponsor for the CRCC High Tech IPO.
