Steel-pipe maker seeks $239 million ahead of HK listing

Undeterred by the weakening sentiment for global equities, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings kicked off an institutional roadshow yesterday for an initial public offering that seeks to raise between HK$1.35 billion and HK$1.85 billion ($174 million to $239 million).

The company, which is known as Chu Kong Pipe for short, makes steel pipes that are used primarily to make pipelines for long-distance transportation of oil and natural gas. The pipes can be used either above or below ground or underwater. This means that the company is exposed to the level of demand for oil and natural gas and its impact on the drilling for and discovery of new resources. The company's key customers include Chinese oil and gas giants China National Petroleum Corp, which is the parent company of Hong Kong-listed Petrochina; China National Offshore Oil Corp; and Sinopec; as well as international names like Shell.

In a preliminary listing document, Chu Kong Pipe notes that PetroChina, CNOOC and Sinopec Shanghai Petrochemical have seen their aggregate capex and investments in exploration and production activities increased to approximately Rmb252 million ($37 million) in 2008 from Rmb86 million in 2003, representing a compound annual growth rate of 24%.

Chu Kong Pipe is looking to sell 30% of its enlarged share capital in the form of 300 million shares. Of the total, 83% are new, while the remaining 17% are put up for sale by existing shareholders. Industrial and Commercial Bank of China and J.P. Morgan are joint bookrunners.

The shares are offered in a range between HK$4.50 and HK$6.15, which translates into a 2010 price-to-earnings ratio of 7.9 to 10.7 times pre-shoe. When the range was set over the weekend, it put Chu Kong Pipe at a discount of at least 8.6% versus its main comparable, Shengli Oil & Gas Holdings, which listed in Hong Kong in November last year. Based on the valuation cited by the bookrunners during the IPO, Shengli on Friday closed at a 2010 P/E of 11.6 times. However, the stock dropped 3.4% yesterday reducing the gap slightly.

Shengli and Chu Kong Pipe both make pipelines for oil and gas transportation, but they apply different techniques. Chu Kong Pipe makes a steel pipe referred to as longitudinal submerged arc welded (LSAW) pipe, which means the pipe is welded lengthwise, making it less likely to leak. By comparison Shengli uses spiral welding.

Shengli also focuses primarily on the domestic market and consequently it has a more concentrated customer focus, while Chu Kong Pipe's customer base spans more than 50 countries and overseas regions. Based on these differences, syndicate analysts argue that Chu Kong Pipe should trade at a premium to Shengli.

Meanwhile, another company in the oil and gas sector -- China Oil and Gas Group -- was in the market last night, raising fresh capital from a top-up placement. The company offered 500 million shares in a wide price range of HK$1.23 to HK$1.45 and at a massive discount of up to 18% versus yesterday's close, which may have been deemed necessary because of an 87% rally in the share price since mid-December when the company struck a natural gas distribution deal with PetroChina. However, it is difficult to understand why the company and its bookrunners then chose to set the upper end of the range at a discount of a little as 3.3%.

With such a generous offer in the market, it was no surprise really that the deal ended up pricing towards the bottom of the range, resulting in a discount of 16.7%. The final price was set at HK$1.25 for a total deal size of HK$625 million ($80.6 million). The shares accounted for about 11.2% of the existing share capital.

According to a source, the deal attracted more than 30 investors, including both long-only and hedge funds - the latter obviously attracted by the steep discount. The majority of the buyers were Asia-based, although there were also some orders from the US. Deutsche Bank was the sole bookrunner.