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Activity in Hong Kong’s equity market surged on Friday as Calgary-based Sunshine Oilsands raised HK$4.49 billion ($580 million) from its initial public offering and AviChina Industry & Technology, a Chinese maker of helicopters and trainer jets, raised HK$1.21 billion from an H-share placement.
Sunshine Oilsands’ IPO was bolstered by a $350 million commitment by three cornerstone investors. The company sold 923 million new shares, or about 32% of the share capital. The deal was priced at HK$4.86 per share, which was at the bottom of the price range that extended to HK$5.08 at the top. The offering comes with a 15% greenshoe that could expand the total deal size to about $667 million.
The retail tranche, which was intended to cover 10% of the deal, was undersubscribed. In fact only 2.3% of the overall offering, or 21.39 million shares, went to Hong Kong retail investors, while the remaining 97.7% was picked up by institutional investors, according to a source.
The institutional tranche was allocated to about 50 investors, with demand coming predominantly from Asia. Although there was some North American demand as well, the source said.
Sunshine Oilsands focuses on the development of oil sands leases in the Athabasca region in Alberta, Canada — a province that claims that its oil sands are the third-biggest proven crude oil reserve in the world, after Saudi Arabia and Venezuela.
BOC International, Deutsche Bank and Morgan Stanley were joint bookrunners for the offering. The listing is scheduled for March 1.
Sunshine Oilsands is the biggest IPO in Hong Kong so far this year, exceeding Chinese steelmaker Xiwang Special Steel, which started trading on Thursday last week after raising $171 million from its initial offering. The third-biggest listing year-to-date raised only about $55 million.
Nearly three months into 2012, the global financial markets continue to be dogged by worries about the eurozone crisis. Xiwang ended 19.6% below its IPO price, sending a gloomy signal to other IPOs in the pipeline. The company extended the decline on Friday when it finished down 0.5%, slightly underperforming the 0.1% gain by the Hang Seng Index.
Xiwang’s institutional tranche, which was meant to account for 90% of the offering, was undersubscribed. As a result, retail investors ended up with 16.3% of the deal, while institutional investors took up only 83.6%. This also meant that the bookrunners were unable to allocate the greenshoe, and hence had no way to help stabilise the share price once it started falling.
By comparison, Sunshine Oilsands’ IPO was off to a strong start after it signed up three cornerstone investors. China Investment Corp (CIC), China’s country’s sovereign wealth fund, pledged $150 million, while China Petrochemical Corp (Sinopec) and US-based EIG committed $150 million and $50 million respectively. Based on the base deal size, this translated into 60% of the offering. The cornerstones are subject to a six-month lock-up.
Although Sunshine Oilsands is based in Canada, several of its major shareholders are Chinese corporations. It secured C$450 million ($450 million at today’s exchange rate) of equity proceeds through a pre-IPO investment by a number of prominent investors in June last year, including Bank of China Group Investment, China Life, Cross-Strait Common Development Fund and Orient International Resources.
The IPO price gives Sunshine Oilsands an enterprise value (EV) of 0.46 times the value of its reserves — defined as the combined total of its proved and probable reserves plus its best-estimate contingent reserves (2P+C). That puts it at a slight discount to Athabasca Oil Sands, which is trading at an EV/2P+C multiple of 0.52, according to sources. Athabasca Oil Sands is viewed as one of Sunshine Oilsands’ major comparables together with BlackPearl Resources, MEG Energy and Southern Pacific.
After its 2011 drilling and seismic operations, Sunshine Oilsands evaluated its leases at 3.1 billion barrels of best-estimate contingent (2C) resources and 419 million barrels of proved and probable (2P) reserves. None of its oil sands leases are operational yet, but the company is generating income from the production of heavy oil from its Muskwa property. Management estimates that it will be producing 1,600 to 1,800 barrels of oil per day by the end of 2012, with the first oil sands production starting in 2013.
The company will use at least 93% of the net proceeds to fund the development of oil sands and heavy/light oil projects, while the rest will be used as general working capital for corporate and other purposes.
The IPO comes after China and resource-rich Canada have been strengthening their relationship in recent years.
Athabasca Oil Sands recently announced that it has sold its 40% interest in the MacKay River oil sands project to a wholly-owned subsidiary of PetroChina International Investment, a move that will reportedly give full ownership of such a project to a Chinese company for the first time.
China has good reasons to go abroad in search of energy. While the country’s rapidly growing economy has boosted demand for energy, “Chinese oil fields are ageing, their reserves‐to‐production ratios are low, and domestic oil production is nearing its peak”, the International Energy Agency said in a report last year. In fact, the National Energy Commission has declared that securing energy supply through international cooperation is one of its major focus areas.
AviChina placement
AviChina Industry & Technology’s H-share placement came at a double-digit discount to Thursday’s close and drew far more demand than the initial fundraising plan, allowing the size to be increased beyond the original upsize option.
The deal was done as a private placement in the sense that it could not be sold to more than 10 investors. However, the number of interested parties was said to have been larger than that and, according to a source, priority was given based on order size. The investors included a mix of blue-chip global long-only funds and a few large blue-chip institutional investors that specialise in alternative assets, the source said.
The deal was launched at a size of 196.7 million shares plus an upsize option of 65.5 million shares. However, this was later increased to 342 million new shares, or 17% of the existing H-share capital. The price was fixed at HK$3.55 each, which translated into a 12.6% discount to Thursday’s closing price of HK$4.06.
Another industry source said that the relatively high discount suggests that the company was more focused on raising capital than getting the best price, and was willing to compensate investors for the modest liquidity in the stock. Based on the final deal size, the offering accounted for close to 40 days of trading volume.
The share price has also almost doubled from its 2011 low of HK$2.05 in late September and is up 25% so far this year. However, it still has some ground to cover to return to last year’s high of HK$5.30, which it reached at the end of May.
The proceeds will be used to fund possible acquisitions of aviation assets and for general corporate purposes, according to the term sheet.
The Reg-S offering was launched on Friday morning after the stock was suspended from trading, giving the bookrunners plenty of time to build a decent order book. BOC International was the sole bookrunner and placing agent.
Established in April 2003, Beijing-based AviChina has been listed in Hong Kong since October of the same year. Its main products include helicopters, regional aircraft, trainers, general-purpose aircraft, aero parts and components, and aero-mechanical and electrical instruments.
The company’s principal shareholders include Airbus parent European Aeronautic Defence and Space Company (EADS), as well as Chinese companies such as Aviation Industry Corporation of China (AVIC), China Hua Rong Asset Management, China Cinda Asset Management and China Orient Asset Management.
EADS, which owns 5%, has made it clear that its stockholding will not be diluted after the transaction, the first source said, indicating that the company bought shares in the placement.
AviChina has cooperated with EADS’s unit Eurocopter on its EC120 series helicopters and Agusta of Italy on its CA109 series, as well as working with Sikorsky of the US to make parts and components for its S92 series.
AviChina has also provided 20% of the investment into a final assembly line for A320 aircraft in Tianjin.
In a similar move, the Chinese aviation company raised $147 million from a fully-underwritten H-share placement in March 2010, which was also led by BOCI on a sole basis. That deal comprised approximately 334.6 million H-shares.
