Two more initial public offerings priced in Hong Kong on Friday, pushing the year-to-date IPO volume in this market to $45.6 billion and increasing the gap versus the previous IPO fundraising record of $43 billion, which was set in 2006.
The biggest of the two was China Rongsheng Heavy Industries Group, a Chinese shipbuilder, which raised HK$14 billion ($1.8 billion) in what was also Hong Kong’s third largest initial share offering this year after AIA Group and Agricultural Bank of China.
However, the most popular of the pair – especially with retail investors – was Citic Dameng Holdings, China’s largest manganese producer, which raised HK$2.06 billion ($266 million). Sources say the fact that the company is a member of the well-known Citic Group and is a mining company with sizeable earnings already (contrary to several other mining companies looking to list in Hong Kong these days) helped to attract investors to the deal. Or as one source put it: “There are so many deals out there and unless it is dirt cheap, it’s hard to get investors to do the work, especially on companies that require a massive discounted cash flow (DCF) analysis. If it makes money already it is a bit easier.”
A reasonable valuation obviously didn’t hurt either. In the end Citic Dameng’s 10% retail tranche was more than 340 times covered, triggering a full clawback that increased this tranche to 50% of the total deal. The institutional tranche too was well covered and attracted hundreds of investors, sources said.
This allowed the deal to price at the top of the range at HK$2.75 for the maximum proceeds. If the 15% overallotment option is also exercised in full, the company will raise $306 million. The shares were offered in a range between HK$2.10 and HK$2.75.
Perhaps due to the larger size, the demand for Rongsheng was a lot more price sensitive. However, sources noted that the quality of the institutional investors was high with the order amount heavily skewed towards long-only funds. According to one source, two-thirds of the top-20 allocations went to long-only accounts, while other buyers included hedge funds and China specialist funds. There was no information on the total demand from institutional investors, but some 250 or so accounts were said to have submitted orders.
The retail tranche was 22 times covered, the source said, which triggered a partial clawback that boosted the size of the retail offering to 7.5% from 5%. Given the large deal size, Rongsheng had applied for, and received, an approval to cap the retail portion of the deal at 20% even of this tranche ended up more than 100 times covered.
The final price was fixed in the lower half of the range at HK$8.00, after the shares were offered between HK$7.30 and HK$10.10. This means the maximum proceeds, if the 15% overallotment is also exercised in full, will be $2.1 billion. Rongsheng had initially hoped to raise up to $2.6 billion.
The company, which was forced to call off an earlier listing attempt in 2008 due to volatile market conditions, is the second largest shipbuilder in China behind Guangzhou Shipbuilding International and the largest among the private sector firms. Its products include bulk carriers, and crude oil takers, as well as containerships. It is a global market leader when it comes to the manufacturing of very large ore carriers (VLOCs) over 300,000 deadweight tonnes, based on the total order book as of August 1. It began construction of its shipyard in the Jiangsu Province in October 2005, signed its first shipbuilding contracts for six Panamax bulk carriers in the first quarter of 2006 and delivered its first vessel in March 2008, proving that it can deliver on what it sets out to do. (Ships classified as Panamax have to be small enough to fit through the locks of the Panama Canal, which means they can typically not be longer than 294 metres and wider than 32 metres.)
It earns most of its revenues from the shipbuilding segment, although the portion has been declining from 100% in 2007 to 94.5% in the first eight months this year as the company continues to expand into other areas such as offshore engineering, marine engine building and engineering machinery.
In the listing prospectus, Rongsheng said it expects its business to become more diversified in the future and approximately 30% of the IPO proceeds will be used to expand its marine engine building and engineering machinery segments through the construction of new manufacturing plants for low-speed marine engines and excavators. It also plans to spend another 10% on potential investments and acquisitions of related businesses, including the acquisition of non-controlling interests in the group’s non wholly owned subsidiaries. Some 25% will go towards the financing of its fourth dry-dock, currently under construction, and to increase the productivity of its shipbuilding segment to take advantage of a rebound in world trade following last year’s global downturn. Another 25% will be used for debt repayments.
Rongsheng sold 25% of its share capital in the form of 1.75 billion shares. Of the total, 80% were new shares. The deal was supported by four cornerstone investors, which bought a combined $155 million worth of shares with a six-month lockup. These were Shining East, a wholly owned subsidiary of China National Offshore Oil Corporation; China Life Insurance; China Southern Fund, a Chinese open-ended fund; and independent investment boutique Atlantis Investment Management.
The final price values the company at 10.8 times its projected earnings for 2011, based on the bookrunner consensus. This compares with 13 times for Singapore-listed Yangzijiang Shipbuilding Holdings, which has been bid up in recent months in connection with a sale of Taiwan depositary receipts in early September, and 11 times for Guangzhou Shipyard. However, given Rongsheng’s expansion beyond shipbuilding neither of these can be seen as direct comparables, sources said.
The deal was jointly arranged by BOC International, CCB International, Deutsche Bank, J.P. Morgan and Morgan Stanley. The shares are due to start trading on Friday.
Citic Dameng will debut a day earlier, on Thursday, after attracting a mixture of good quality long-only funds, resources specialists and hedge funds. The majority of the demand came from Asia, but with good interest from Europe and the US as well. The company also signed one cornerstone investor – Gaoling Fund – which bought $80 million worth of shares, or about 30% of the deal at the final price. The Asia-focused fund is managed by Hillhouse Capital Management, a Chinese hedge fund that typically makes investments for the long-term and has a bottom-up approach to selecting its targets.
Citic Dameng sold 750 million new shares, which accounted for 25% of the enlarged share capital. The IPO price valued the company at 12.6 times its projected 2011 earnings, which is significantly below other Chinese mining companies listed in Hong Kong such as China Molybdenum (at 20 times), Hunan Nonferrous Metals (at 22.5 times) and Jiangxi Copper (at 25 times). However, Citic Dameng is both smaller and more niche than either of those.
With more than 83% of its revenues coming from the production of manganese, the company is viewed virtually as a pure-play manganese producer. This is quite rare and there are no direct comparables listed in either Hong Kong or China. Its primary product is electrolytic manganese metal, or EMM, which is used in the production of special steel, high performance stainless steel, copper and aluminium alloys and electric welding rods. Its other products are used for steel manufacturing and for the production of batteries, fertiliser and animal feed.
The company operates two mines, as well as ore processing and downstream processing operations in China, and is developing a manganese mine in Gabon in Africa through a 51%-owned joint venture. The African mine is expected to begin operations at the end of the first quarter 2011. It also has sizeable manganese reserves, which are expected to support about 75 years of mine production.
The IPO was arranged by Bank of America Merrill Lynch, Citic Securities and UBS.
