Two Chinese companies test Hong Kong IPO appetite after summer lull

Bankers started pre-marketing yesterday for Zhengzhou Coal Mining Machinery, which is aiming to raise about $400 million to $500 million from its initial public offering in Hong Kong, a source said.

Separately, Fosun Pharmaceutical is expected to start pre-marketing sometime next week for its IPO of about $500 million to $600 million, according to other sources.

The two companies aim to list their shares in Hong Kong next month and, if successful, may help revive Hong Kong’s IPO market, which has been quiet since the summer. They will also be the first IPOs of size since Inner Mongolia’s Yitai Coal raised HK$7 billion ($902 million) in early July — the second-biggest offering in Hong Kong this year after Haitong Securities’ $1.67 billion IPO in April.

Hong Kong has been the world’s top destination for new listings for the past three years, but ranks fifth this year behind Nasdaq, New York, Tokyo and Kuala Lumpur, according to Dealogic.

New issuers have raised about $5.6 billion in Hong Kong this year, which compares with $35.5 billion raised in 2011, $67.9 billion in 2010 and $34.8 billion in 2009, according to Dealogic.

The world’s top IPOs so far this year are Facebook’s $16 billion IPO in May, Japan Airlines’ $8.5 billion offering this month and Felda Global Ventures’ $3.1 billion IPO in June in Malaysia.

The latest signs of activity come after central banks in the US and eurozone paved the way for a new round of asset purchases last week. After booking gains of more than 4% last week, the Hang Seng Index inched down 0.3% yesterday. It is now up more than 9% since late July, bringing its year-to-date rise to nearly 16%.

The rest of the timetable for Zhengzhou Coal’s IPO is not yet fixed, but the listing is targeted for early to mid-October, one source said. The person noted that it plans to sell somewhere between 15% and 20% of the company through the offering.

The machinery company’s Shanghai-listed stock ended yesterday’s trade 0.4% lower at Rmb10.45. It is down more than 15% since the start of the year, but has recouped about 2.5% from a low in September. It was listed on the Shanghai Stock Exchange in 2010.

The Shanghai Stock Exchange Composite Index is down about 7% year-to-date.

Zhengzhou Coal is a leading maker of mining and excavating equipment in China, according to a draft prospectus, citing the China National Coal Mining Machinery Industry Association. It is the country’s biggest maker of hydraulic roof supports, with about a 22.6% market share of production in 2011, it said.

It is the first company in its specialist industry to list in Hong Kong, making it difficult to value, but investors may compare it to Sany Heavy Equipment International, one source said.

The company’s proven track record, strong balance sheet and global customer base are among the attractions to potential investors, another source noted.

The company’s earnings have been on an uptrend during recent years, growing to Rmb1.2 billion in 2011 from 646.8 million in 2009, according to the draft prospectus. That represents a compound annual growth rate of 37%.

Zhengzhou Coal’s long-term objective is “to become a leading manufacturer of comprehensive coal mining and excavating equipment in the world”, according to the draft prospectus. It says the company plans to strategically increase its global presence and market share and grow its operations through acquisitions and joint ventures.

Among risk factors, the company cited fluctuations in steel and other raw materials prices, and general economic and market conditions in China and globally.

Citic Securities, Deutsche Bank, J.P. Morgan and UBS are joint global coordinators and bookrunners for the deal. ICBC International is a joint bookrunner.

Fosun Pharmaceutical
The pre-marketing for Fosun Pharmaceutical is expected to start next week, but the rest of the schedule has not been fixed, as it will be subject to investor feedback and market conditions, another source said. The listing is expected in mid-October.

The pharmaceutical company’s Shanghai-listed shares have climbed about 26% since the beginning of the year. The company’s stock ended yesterday’s trade almost unchanged at Rmb10.69. Fosun was listed in Shanghai in 1998.

Fosun specialises in modern biological medical and health industry and regards R&D, manufacturing and distribution of the medicines as the core, according to the company website. Its net profit has increased by 13.55 times since listing and its annual compound growth rate has reached 24.3%, it says.

By buying into the company, investors can get exposure to the growth potential of the pharmaceutical distribution and manufacturing segments in China, according to the source.

For comparison, investors are likely to look at companies such as Shanghai Pharmaceuticals and Sinopharm.

CICC, Deutsche Bank, J.P. Morgan and UBS are arranging the deal.