China Nuclear Engineering Corporation (CNEC), the country’s nuclear construction giant, raised Rmb1.82 billion ($278 million) from its long-awaited initial public offering in Shanghai, making it the second largest A-share flotation so far this year.
The nuclear power plant builder sold 525 million new shares, or 10% of its enlarged share capital, at Rmb3.47 per share, according to its filing with the Shanghai stock exchange on Thursday.
The IPO saw huge interest from retail and institutional investors reflecting, analysts say, the huge potential for growth in energy-hungry China's fast-developing nuclear industry. Others pointed to the impact of new rules that allow investors to apply for shares without putting down money up front.
The IPO price values CNEC at a price-to-earnings multiple of 15.6 based on 2015 figures, slightly higher than the average 14.49 times earnings of its A-share counterparts in the construction industry on a trailing one-month basis, according to its filing and data from China Securities Index, an official A-share index tracker.
In spite of the stock market volatility, a number of equity analysts and traders see CNEC’s IPO performing well in the secondary market, given it has been priced at a big discount to fair value estimates.
China Merchants Securities, for instance, puts fair values between Rmb5.9 to Rmb9.4 per share, or 15 to 20 times 2016 earnings, and indicates up to 170% upside from the IPO price.
“Nuclear power only contributed 3.03% of total power production in China last year, while the figure was 76.34%, 19.5% and 18.59% in France, the US and Russia, respectively. There’s ample room for the nuclear industry to develop [in China],” analysts at China Merchants Securities said in a report on Wednesday.
“China aims to increase its nuclear capacity from 28.48GW in 2015 to 58GW in 2020. This will benefit CNEC a lot,” they added.
CNEC opened both its institutional and retail books on Wednesday and drew strong demand from investors during the one-day book building.
The institutional tranche closed 1,664 times covered, while the retail tranche was 1,072 times oversubscribed. The latter therefore triggered the clawback mechanism, which boosted the retail allocation from 30% to 90% as the oversubscription of the public offering exceeds 150 times. The original split between the retail and institutional tranches had been 30%/70%.
The strong interest reflected rules implemented this year, under which investors no longer have to put down money up front for all shares they apply for, instead paying only when they are allocated shares.
"Because you don't have to pre-pay for subscribing to new shares now, it's becoming more like a national lottery, although the winning rate is lower than before. You at least had to deploy much more capital for pre-ordering new shares in the past. Not everyone had sufficient capital for each IPO," said one Beijing-based fund manager at Citic Securities.
24 A-share IPOs were more than 500 times oversubscribed in their retail tranches as of late March, four of which were even more than 4,000 times covered, according to data provider Wind Information. In January, Suzhou Institute of Architectural Design said its $48 million Shenzhen IPO was 4,353 times oversubscribed in the retail book.
Meanwhile, more than half of these IPOs outperformed in the secondary market, with 13 rising more than 150% since their debut, according to Wind Information.
The listing process was, however, delayed by the Fukushima nuclear disaster in Japan in 2011 and then the stock market crash in China last summer.
The company won an initial regulatory approval to go public in June 2015, but Beijing suspended all IPOs in the wake of the stock market rout as an attempt to stabilise the market conditions. Some 28 companies also agreed to “voluntarily” postpone their IPO plans at the time.
CNEC’s long-awaited transaction is also the second largest A-share IPO since the country’s IPO market reopened for business last November, after First Capital Securities’ $359 billion listing in Shenzhen last month, according to data provider Dealogic.
The company plans to use the proceeds to buy nuclear construction equipment, build nuclear power plants, paying for research projects, and replenishing working capital.
CNEC, which claims to be the only Chinese firm working “non-stop” in the nuclear construction business over the last 30 years, has attracted big names to its list of long-term clients. They include China National Nuclear Corporation and China General Nuclear Power Group, two state-backed Chinese nuclear power giants.
According to China Merchants Securities, the company has been in charge of building 90% of nuclear power plant units in China and 41% globally.
With an expertise in nuclear power-related construction, CNEC also quickly diversifies its business to national defence projects and other civil and industry projects, with the latter now accounting for 61.4% of its total income last year.
CNEC recorded revenue of Rmb41 billion in 2015, down 8.55% from about Rmb45 billion one year earlier, while its net profit rose from Rmb733 million to Rmb913 million over the same period.
Prior to CNEC’s IPO, some larger Chinese nuclear power players had flocked to tap the capital market to support projects both domestically and overseas.
China National Nuclear Power Corporation (CNNPC), a unit of China’s two state nuclear reactor builders, raised $2.16 billion through its Shanghai IPO in June 2015. China General Nuclear Power (CGN Power), the country’s largest nuclear energy producer, raised $3.64 billion from Hong Kong’s largest IPO through its December 2014 IPO, Hong Kong's second largest of that year.
CNNPC now trades at roughly 24 times its 2016 earnings in Shanghai, while CGN Power is trading at 13 to 14 times its 2016 earnings in Hong Kong.
Domestic brokerage China Securities was the sole sponsor of the CNEC IPO.
