China Forestry raises $200 million ahead of HK listing

China Forestry Holdings has priced its initial public offering close to the top of the range, allowing it to raise HK$1.55 billion ($200 million) ahead of its Hong Kong listing on December 3.

The privately held forest owner and operator, which counts Carlyle as one of its pre-IPO investors, attracted quite a bit of interest both by institutional and retail investors who viewed it as a way to get exposure to China's construction boom through a different means than the real estate sector. With its plantations located in Sichuan and Yunnan, China Forestry is particularly well placed to benefit from the reconstruction of the areas affected by last year's earthquake in Sichuan.

According to a source, retail investors subscribed for 113 times more shares than were initially available to them, triggering a full clawback that increased the retail tranche to 50% from 10%. The remaining 50% institutional tranche was about 13 times covered and attracted about 80 investors. Most of the demand, about 70%, came from Asia, while European investors accounted for approximately 25% and the US 5%.

The demand was strong enough to price at the top, but as a gesture to the investors, the company decided to fix the price slightly below the top at HK$2.07. The shares were offered in a range between HK$1.60 and HK$2.10 and while it is debatable whether a 3 HK cent reduction will have much impact on the aftermarket trading, psychologically it is at least sending a positive signal.

Meanwhile, three other companies that started trading yesterday all had a good first day. In Hong Kong, Sany Heavy Equipment International rallied 46%, while property developer Fantasia Holdings Group gained 2.3%. And in Singapore, CapitaMalls Asia, a shopping mall business that was spun off from CapitaLand, closed 8.5% above its IPO price. The positive debuts across the board -- and the fact that China Forestry's offering was well covered -- bodes well for the string of listing hopefuls that are still trying to get their deals done before investors close their portfolios for the year.

China Forestry initially planned to list last autumn, but called off the attempt in early October last year as it felt the financial markets were too busy dealing with the consequences of the Lehman Brothers collapse and the financial crisis in general to pay much attention to what it had to say.

Those distractions are now gone, but the story that the company told investors during its roadshow is largely the same as the one it was trying to get across last year. It still owns 171,780 hectares of forest land in the south-western provinces of Sichuan and Yunnan and it still ranks as one of the top three privately held operators of naturally generated and plantation forest in China in terms of coverage area. It harvests and sells logs to manufacturers in the construction, furniture, interior decoration, wood product and paper industries in China, while also focusing on the sustainable development of its forests.

The IPO price values the company at about 8.5 times its 2010 earnings, as per the consensus forecast from the two bookrunners. It also pitches the company at a 37% discount to its net asset value. However, this didn't provide too much guidance for potential investor since there are no close comps to compare it too. Toronto-listed Sino-Forest Corp also operates in China, but instead of owning the land on which it grows its trees, like China Forestry does, it leases it. Still, Sino-Forest's share price has had a good run as log prices has been on the rise and may have had a positive impact on sentiment. That stock currently trades at a 2010 price-to-earnings multiple of 10.4.

Hong Kong-listed China Grand Forestry, meanwhile, is a much smaller company, and a struggling penny-stock at that, making it irrelevant as a comparable for valuation purposes.

China Forestry sold 25% of the company in the form of 750 million new shares. The deal includes a 15% overallotment option that could increase the total proceeds to $230 million. Private equity firm Carlyle will own 11.2% of the company post the IPO.

Standard Chartered and UBS were joint bookrunners for the offering. Both banks retained their mandates from last year's aborted listing attempt, although back then the names on the prospectus would have been Cazenove and UBS. Cazenove has since been acquired by Standard Chartered.