China Energy Engineering is selling at least 64% of its initial public offering in Hong Kong to cornerstone investors, aping other jumbo offerings this year to help navigate an uncertain market and ensure the deal is completed.
Nearly all the billion-dollar IPOs completed since China's summer market rout have been structured with a cornerstone tranche that exceeds half the total deal size. Bankers argue that it is a healthy strategy that minimises the issuer’s risk but these deals are often labelled as “friends and family” transactions and lack a genuine price discovery process.
For China Energy it may yet provide a safety net if investor sentiment deteriorates further due to rising political tensions in the Middle East, with shares in Hong Kong dipping on Wednesday after Turkey shot down a Russian jet fighter near the Syrian border.
China’s largest power construction contractor by contract value is selling 8.8 billion H-shares at HK$1.59 to HK$1.73 per share to raise between HK$14 billion and HK$15.2 billion ($1.8 billion and $1.96 billion). There is a 15% greenshoe to sell an additional 1.32 billion shares.
Based on the indicative offering size at the base level, the total cornerstone commitment of $1.27 billion will cover 70% of the deal if it is priced at the bottom end of the indicative range, or 64% if priced at the top.
In the case of a bottom-end pricing, only $540 million worth of shares will be open to subscription by institutional and retail investors.
Similar to other Chinese state-owned enterprises, China Energy’s list of 20 cornerstone investors includes mostly Chinese financial institutions, state funds, and energy companies. General Electric is the only non-Chinese and also the smallest cornerstone investor with a commitment of $15 million.
The other 19 cornerstone investors are Silk Road Fund ($300 million), State Grid ($200 million), China Southern Power Grid ($60 million), Huaneng Renewables ($50 million), China Datang Overseas ($50 million), Huadian Fuxin Energy ($50 million), CGN Group ($50 million), China XD Group ($50 million), Zhejiang Energy Group ($50 million), Beijing Energy Investment ($50 million), Zhongchuan Investment ($50 million), Shanghai Everbright Securities ($50 million), Citic Bank ($50 million), Sichuan Sans Venture Capital ($50 million), Ping An ($30 million), Shandong State-Owned Asset Investment ($30 million), Citic Heavy Industries ($30 million), Hengjian International Investment ($30 million) and China Construction Investment ($20 million).
Valuation
China Energy’s IPO is being marketed at 8.27 to 8.99 times forecast 2016 earnings. By comparison, Power Construction Corporation of China (Power China) is trading at a much richer valuation of 17.8 times earnings on a rolling 12-month basis.
China Energy and Power China dominate engineering, procurement, and construction in the Chinese power industry with a combined market share of 99%. China Energy specialises in the construction of thermal coal power projects, while Power China focuses on hydro power construction projects.
Due to price differences between the Hong Kong and China markets, a source familiar with the situation suggested taking Sinopec Engineering as another comparable. The price of shares in the Sinopec subsidiary -- which is also engaged in engineering, procurement, and construction -- ended at HK$6.05 on Wednesday, equating to 6.7 times 2016 consensus analyst estimate earnings.
China Energy is the largest shareholder of China Gezhouba Group, a hydropower construction giant and a contractor of the Three Gorges Dam project on the Yangtze River. Its 42.05% shareholding is worth $2.53 billion based on China Gezhouba’s current market capitalisation.
The company started collecting institutional orders on Wednesday and will begin the Hong Kong public offering on Friday. Trading is slated for December 10.
CICC and Citic CLSA are joint sponsors of the IPO. CCB International, CMB International, Goldman Sachs, HSBC, Morgan Stanley and Nomura are joint bookrunners.
