MCC prices H-share IPO below mid-point to raise $2.35 billion

Metallurgical Corporation of China yesterday priced the H-share portion of its dual-listing initial public offering below the mid-point at HK$6.35 per share for a total deal size of HK$18.23 billion ($2.35 billion). Together with the earlier priced A-share portion, the company raised a total of $5.15 billion, which makes it the second largest listing in the world this year after China State Construction Engineering's $7.34 billion A-share IPO in July.

It is also the largest Hong Kong IPO since China Railway Construction Corp's $2.55 billion initial share sale in March 2008.

Sources said the institutional portion of the H-share offering was more than 10 times covered before a clawback, and noted that there was enough demand to price the deal at the top and still place it with quality investors. However, the company decided not to be too aggressive as the valuation was already quite rich and its funding target would be achieved even if the deal was priced below the top. The management was also quite keen to see the stock trade well in the aftermarket, they said.

Part of the reason for the relatively high valuation was that Chinese regulations stipulate that the H-shares have to price above the A-shares, and to give themselves as much flexibility as possible, the bookrunners therefore set the H-share price range just above the A-share range. The A-shares were offered in a range between Rmb5.00 and Rmb5.42 and priced at the top, with the final price translating into about HK$6.15 per share.

The H-shares were offered in a range between HK$6.16 and HK$6.81, which represented a fully diluted 2010 price-to-earnings multiple of between 16.4 and 18.1 times, based on syndicate consensus forecasts. The final price of HK$6.35 translates into a 2010 P/E of about 16.8 times. By comparison, two of the key comparables that investors used as a benchmark -- China Railway Group and China Communication Construction Corp -- currently trade at 16.2 and 13.3 times their respective 2010 earnings, according to Bloomberg.

Sources said a valuation premium versus those two companies was not unreasonable given that MCC has a much more diversified business with four core areas: engineering and construction (E&C), resources development, equipment manufacturing and property development.

The retail tranche, which accounted for 5% of the H-share offering, was more than 200 times covered, according to a source, which means it tied up more than $23.5 billion of retail cash. This was less than the $60 billion of retail funds committed to Sinopharm's $1.13 billion IPO, which priced the day before MCC, but still highly respectable. The oversubscription meant that a full clawback was triggered, increasing the retail tranche to 20% of the deal.

This, together with the fact that $250 million of the deal was set aside for five cornerstone investors (China Overseas Finance Investment, CCB International Asset Management, China Road Engineering and Investment Co, Bank of China Group Investment, and Citic Pacific), meant that the actual size of the institutional tranche was about $1.6 billion. Based on the overall subscription ratio, that portion would have been about 14 times covered. The source said more than 600 investors, including high-net-worth individuals and corporates, submitted orders and "quite a few" ended up with zero allocations.

Excluding the Hong Kong retail tranche, the majority of the demand came from Asia, followed by Europe and the US.

MCC sold 2.87 billion H-shares, which accounted for 45% of the combined A- and H-share offering and 15% of the enlarged issued share capital. The latter may increase to 16.9% if the 15% greenshoe on the H-share portion is exercised in full. That would also bring the H-share proceeds to $2.7 billion and the combined IPO size to $5.5 billion.

Engineering and construction is MCC's largest business area, making up more than 80% of revenues and profits. The company is particularly strong -- the largest in the world in fact -- within metallurgical E&C, which refers primarily to the design and construction of large-scale steel mills. This segment makes up just over 55% of its revenues and, with an operating history dating back to the 1940s, one syndicate research report estimates that the company has participated in more than 90% of the steel mill construction work in China.

However, sources suggest that while metallurgical E&C will continue to bring in sizeable revenues, it is other parts of the business, including non-metallurgical construction and its overseas natural resources business that will be the key growth drivers in the years ahead, as the steel industry battles with overcapacity and a lack of demand for new plants.

MCC's A-shares will start trading in Shanghai on Monday (September 21), while the H-share debut is scheduled for September 24. The H-share portion was arranged by China International Capital Corp, Citi, Citic Securities and Morgan Stanley, while Citic Securities lead the A-share offering.

Meanwhile, China Lilang fixed the price on its significantly smaller offering close to the top end of the range yesterday to raise HK$1.17 billion ($151 million) ahead of a Hong Kong listing on September 25. A source familiar with this transaction stressed that the pricing at HK$3.90, just off the top of the HK$3.20 to HK$4.00 price range, was not forced by a lack of demand or limit orders, but a recognition by the management that a slight concession on price now might improve the aftermarket trading. Given that Lilang, a designer, manufacturer and distributor of branded menswear targeting China's mass-market, is not a "must-own" stock and that there are a multitude of new companies scheduled to start trading this month and next, that may have been a smart move. The final price translates into a 2010 P/E ratio of 12 times post-shoe.

The source said Lilang's 10% retail tranche was 150 times subscribed, triggering a full clawback that increased the retail portion to 50% of the deal. The institutional tranche was about 25 times covered after the clawback and attracted 100-150 investors. About two-thirds of the institutional demand came from Asia, while the majority of the remaining demand was generated out of Europe.

Lilang sold 300 million new shares, or 25% of its enlarged share capital. The deal was arranged by Bank of America Merrill Lynch and HSBC.