Rush for shares allows China Moly to lift its price

Listing candidates China Citic Bank and China Molybdenum have both made changes to their price ranges in time for the launch of the retail offerings, resulting in a slight adjustment to their respective offering sizes. However, their reasons for doing so are not the same.

China Moly, which operates one of the largest molybdenum mines in the world, has increased the upper end of its price range to HK$6.80 from HK$6.40, which will lift the maximum proceeds to $943 million (HK$7.3 billion) from $888 million. If the 10% greenshoe is also exercised, the deal could reach as much as $1.04 billion.

The increase was announced early Thursday after only three days of marketing, but according to sources, the institutional tranche was already multiple times covered. And with no price sensitivity at all in the book, the company – and its joint bookrunners Morgan Stanley and UBS – saw the chance to raise a few extra dollars. The bottom of the price range was left unchanged at HK$5.

The company is the first molybdenum producer to list in Hong Kong and investors are said to like it because it is in a prime position to benefit from the rapid growth in China’s stainless steel industry. Molybdenum is used as an alloy to harden various forms of steel, including stainless steel, for use in the construction, shipbuilding, auto, defense and oil industries among others.

The growth potential was highlighted earlier this week when UBS raised its global forecast for molybdenum prices by 13% for 2007 and 10% for 2008 following higher than expected prices in the first quarter. The new forecasts, which refer to the average price during the year in question, suggest a 2007 price of $25/lb and a 2008 price of $22/lb. The price is currently hovering just below $30.

China Moly is also about to start recovering tungsten, which is a by-product from molybdenum processing with similar qualities and applications. So far the company hasn’t been doing any of this recovery on its own, but seeing as it owns the world’s second largest reserves of tungsten, this business is expected to become an important growth driver, observers say.

Citic Bank’s offering is also “significantly covered” already, but this is not the reason for the adjustment. In fact, the Mainland’s seventh largest lender in terms of assets has lowered the top end of the price range, resulting in a slight reduction of its maximum deal size. The strong demand has allowed it to also increase the low end, however, bringing about a tightening of the entire range to HK$5.06 to HK$5.86 per H-share. The previous range was HK$4.72 to HK$6.17 per share.

A source close to the offering said the change was prompted by the fact that the so called “price discovery process” in China, which was completed only on Wednesday, had come up with a slightly tighter range for the A-share portion of the deal. And since the price on the A- and H-share tranches of the dual offering is meant to be the same (adjusted for the exchange rate) the H-share range had to be adjusted as well.

During the price discovery process, a select number of institutional investors – in this case 190 of them – provides feedback on the appropriate price level and a range is then worked out based on the mean and the average. The range needs approval from the Mainland regulators, which Citic Bank received early yesterday.

The source said the participating investors had likely tried to keep the price down to ensure China Citic’s IPO valuation wasn’t too high versus its comparables. In particular they had noted that China Merchants Bank, which currently trades at a 2007 price-to-book multiple of almost four times in the H-share market, was sold at only 2.44 times its 2006 book value during IPO in September last year.

The new price range values Citic Bank at a 2007 P/B multiple of 2.56 to 2.75 times. As a reference, Industrial and Commercial Bank of China currently trades at about 2.8 times, while Bank of China is quoted at about 2.1 times.

The range will lower the maximum proceeds from the H-share offering to $3.7 billion from $3.9 billion, or to $2.6 billion when excluding the shares that will be sold to two strategic investors. Banco Bilbao Vizcaya Argentaria and the group’s Hong Kong-listed bank holding company Citic International Financial Holdings will buy a combined 29.4% of the deal to prevent their existing stakes from being diluted.

Including the A-share tranche, the maximum deal size will now be $5.4 billion, compared with $5.7 billion under the previous price range. There is still a greenshoe which could add another 15%, depending on the demand in the secondary market after listing.

The price range for the A-share tranche has been tightened to Rmb5.0 to Rmb5.80 from the previous Rmb4.66 to Rmb6.10.

The H-share portion of the deal is being jointly arranged by China International Capital Corp, Citic Securities, Citigroup, HSBC and Lehman Brothers.

China Moly will start taking orders from Hong Kong retail investors today (April 13) and Citic Bank will follow suit on Monday. The companies will set the final price after the US close on April 18 and 19, respectively.