Hanking prices $148 million IPO at bottom

Iron ore miner China Hanking Holdings last night fixed the price of its Hong Kong initial public offering at the bottom of the range, allowing it to raise HK$1.15 billion ($148 million).

The pricing came after the Hong Kong market slumped for a fourth straight day and following a terrible week for other miners, both in Hong Kong and globally, but work by the bookrunners to secure sufficient demand for the stock before launch meant the company was able to pull the deal across the line. By comparison, Xiao Nan Guo Restaurants Holdings and Sany Heavy Industry both called off their IPOs last week and XCMG Construction Machinery decided not to go ahead with its institutional bookbuilding yesterday.

However, Hanking was not an easy sell and while the company didn’t lose any of the investors it had lined-up before it kicked off bookbuilding, sources say it was a challenge to get additional orders. As a result, the offering was only marginally oversubscribed, and according to one source the bookrunners will not be allocating the full 15% greenshoe. In fact, as of last night it seemed possible that they wouldn’t be allocating any shoe at all.

This means the banks have no way to help stabilise the share price when the stock starts trading – something which could be a real issue if the market remains as volatile as it is at present. The most recent Hong Kong IPO not to allocate a greenshoe was Newton Resources, a fellow Chinese iron ore miner that raised $225 million in an IPO in late June – at a time when the demand for market newcomers was also quite poor. Newton held up well on its first day of trading, falling only 1 HK cent, but dropped 15.5% over the next six sessions. It is currently trading 43% below the IPO price.

Hanking, which operates four iron ore mines and five processing plants, is due to start trading on Friday.

What could help counter the absence of stabilising activities is the fact that most of Hanking’s shares were placed with a relatively small group of investors. As reported earlier, three cornerstone investors bought $60 million worth of shares, which at the final price corresponds to just over 40% of the deal. And the allocation of the remainder was also quite concentrated.

The buyers included private wealth managers, which were said to have made up “a reasonable amount” of the demand, corporate-type private wealth accounts and a small number of institutional investors. Most of the demand came from Asia-based accounts, but there was also some interest from the US.

The cornerstone investors were Hong Kong investment company SAIF Partners which invested $30 million, Chinese gold and copper miner Zijin Mining which took $20 million worth of shares, and Chinese steel manufacturer Baosteel which bought $10 million of the deal. They have all agreed to a six-month lock-up.

As expected, retail investors were not particularly keen and the 10% retail tranche was said to be less than 30% covered. This isn’t too dissimilar to branded shoe manufacturer and retailer Hongguo International, whose retail tranche was 19% covered, and suggests that retail investors prefer to stay on the sidelines for the time being – even when it comes to deals in otherwise popular sectors such as consumer retail. Hongguo raised $208 million from an IPO that priced just over a week ago. The stock has fallen 15.2% since it started trading on Friday.

Hanking’s excess retail shares will be taken up by institutional investors.

The total deal accounted for 25% of the enlarged share capital and comprised 459 million shares, of which 72% were new. The price was fixed at the bottom of the HK$2.51 to HK$2.93 price range, which translates into a 2011 price-to-earnings ratio of 5.3 times.

This could prove tough to live up to when the stock starts trading as most of its comparables have cheapened substantially since Hanking opened its order books last Tuesday.

China Vanadium Titano-Magnetite Mining, which is viewed as the closest Hong Kong-listed comp, is currently trading at 3.5 times this year’s earnings, after falling 30% since last Monday. It fell 8.5% yesterday and is off 69% from its 2011 high in late April.

The sell-off has also hit broader resources companies, with Australian mining giant Rio Tinto falling 14.2% in the past week. This has reduced its 2011 price-to-earnings multiple to about 6.6 times, according to Bloomberg data.

The fact that the deal got done should come as a relief for Hanking, which was up against an IPO deadline on October 13, which related to a pre-IPO loan provided by Credit Suisse, DE Shaw and Baosteel. The lenders received a number of warrants that were issued by the chairwoman, which they have agreed to cancel on the day Hanking becomes a listed company in return for a cash payment of $43.3 million. If Hanking had missed the October deadline, the chairwoman would either have to enter into a new agreement with the warrant holders or pay an additional cash compensation.

The deal was arranged by BNP Paribas, Credit Suisse and Deutsche Bank.