Metals and mining might not be the most popular industry at the moment, but China Hanking Holdings has secured enough interest to allow it to pull off a Hong Kong initial public offering this week. The Liaoning-based iron ore miner is aiming to raise between HK$1.15 billion and HK$1.34 billion ($148 million to $172 million).
It kicked off both the institutional and retail tranches of the IPO yesterday and will keep the books open only until Friday. Such a tight marketing schedule suggests that the deal would have been largely covered before launch and sources confirmed that this was the case.
“It was launched with the knowledge that it will get done,” one source said.
The company has lined up three cornerstone investors, which will buy a combined $60 million worth of shares, or slightly more than 40% of the offering if the price is fixed at the bottom of the range. The investors are Hong Kong investment company SAIF Partners, which is investing $30 million, Chinese gold and copper miner Zijin Mining, which is taking $20 million worth of shares, and Chinese steel manufacturer Baosteel, which is buying $10 million of the deal. They have all agreed to a six-month lockup.
But aside from these three, it had also got informal commitments to invest from other accounts, something which bankers say is crucial amid the current market volatility. To launch a deal without having a good idea of who will buy it is a real challenge, they say.
Perhaps in a reflection of this, Sany Heavy Industry will scrap its initial plan for an accelerated timetable and delay the launch of its retail offering, which was meant to open today. The decision to hold off came just one day after the Chinese machinery maker started its institutional roadshow on Monday and will give the bookrunners more time to build a decent order book. It will also allow more time for investors to meet with the management. The company, which is already listed in Shanghai, has set no new time for the retail offering, but it is widely assumed that it will open next Monday.
Sany is aiming to raise between $2.8 billion and $3.3 billion from the Hong Kong IPO and has no cornerstones to back the offering. Bank of America Merrill Lynch, Citi, Citic Securities and ICBC International are joint bookrunners.
Smaller rival XCMG Construction Machinery, which was also expected to kick off its institutional roadshow on Monday, had earlier chosen to postpone the offering by at least a week to allow itself more time to engage investors pre-launch. The company is aiming to raise up to $2 billion and is being brought to market by BNP Paribas, CICC, Credit Suisse, HSBC, Macquarie and Morgan Stanley.
Hanking initially planned to come to market in late June, but faced with a difficult market environment that prompted several Hong Kong IPOs to be pulled and saw numerous others trade down after their debut, it decided not to go ahead with the deal at that time. According to sources, the bookrunners also had difficulties agreeing on a valuation range.
But, having already done investor education a few months back may have helped in the discussion with investors ahead of this launch. The deal size is also smaller than the around $230 million that the company was aiming to raise in June. This is partly due to the fact that valuations for the sector as a whole have come down, but in light of this the controlling shareholder has also decided to sell fewer shares.
The deal will now account for 25% of the enlarged share capital, versus the earlier plan to sell about one-third. Hanking is offering 459 million shares, of which 72% are new. The rest is being sold by chairwoman Yang Min, who is also the founder of the company. As a result of the IPO, her stake in the company will be reduced to 42.7% from 60.7%. Ten percent of the deal will be earmarked for retail investors and there is a usual 15% greenshoe.
The shares are offered at a price between HK$2.51 and HK$2.93 apiece, which translates into a price-to-earnings valuation of 5.3 to 6.2 times for 2011, on a pre-greenshoe basis. For 2012, the valuation drops to 4.2 to 5 times.
While this sounds quite cheap on paper, the mining sector has come under significant pressure in the past couple of months and global giants like Rio Tinto and Vale are trading at 2011 P/E multiples of 7.6 and 5.4 respectively.
China Vanadium Titano-Magnetite Mining, which is viewed as the closest Hong Kong-listed comparable, is trading at 4.1 times this year’s earnings after falling 59% from its 2011 high in late April. The stock has lost 14% in the past two days alone.
Hanking is obviously a lot smaller than both Rio Tinto and Vale, but contrary to several other mining companies that have listed, or tried to list, in Hong Kong this year, it does have an established business and a solid track record. It owns four iron ore mines and five processing plants and, based on last year’s production volume of 1.315 million tonnes, it ranks as the largest privately owned iron ore producer in northeastern China.
Also, its reserves generally have low levels of impurities and its mines are located close to its customers, allowing the company to keep its production costs quite low. According to the listing prospectus, its average cash operating cost for one tonne of iron ore concentrates last year was Rmb244 ($38). By comparison, the average cash operating cost for Chinese miners in 2009 was Rmb500 per tonne.
That said, its average selling price of iron ore concentrates have been fluctuating a lot in the past three years, which it says is primarily due to changes in economic conditions, both globally and in China. As a result, revenues and profits have also been volatile. Following a decline in 2009, it reported a 53% revenue increase last year to Rmb1.3 billion, while net profit more than tripled to Rmb444 million. In the first six months this year, it posted revenues of Rmb752.6 million and a net profit of Rmb136.3 million, down 28% from the same period a year earlier. The company is forecasting a 2011 profit of at least Rmb393 million after adjusting for the amortisation of Rmb176 million related to the cost of warrants.
One concern for investors is that 86% of the net IPO proceeds will be used to repay a pre-IPO loan. The remaining 14% will go towards the expansion of its existing mines and production facilities, as well as the acquisition of new mines.
The reason for Hanking having decided to brave the tricky market environment at this point in time – the markets really are no better than they were in June – is directly related to the $120 million pre-IPO loan. In connection with the loan, the lenders received a number of warrants that were issued by Yang. In June, however, Yang agreed to pay the three warrant holders a total of $43.3 million to cancel the warrants on the day Hanking becomes a listed company. If the listing hasn’t happened by October 13, Yang will either have to enter into a new agreement with the warrant holders or pay an additional cash compensation.
The offering will close on Friday and the final price will be fixed on the same day. The trading debut is scheduled for September 30. BNP Paribas, Credit Suisse and Deutsche Bank are joint bookrunners.
