Dual IPOs that raised US$ 5.3 billion for Metallurgical Corp. of China could portend a big change for Chinese stock debuts.
By Wang Xiaolu and Wang Duan 07 October 2009
(Caijing Magazine) An era of rocket-fuel takeoffs for initial public offerings may be drawing to a close on the Chinese stock market.
Analysts said IPO investors may be coming back to planet Earth after the September debuts of Metallurgical Corp. of China Ltd. (MCC) on the Hong Kong H-share and Shanghai A-share markets.
Factory construction and resource conglomerate MCC (SSE: 601618, HKEX: 01618) was the first company in 10 months allowed by Chinese government regulators to simultaneously list on the A- and H-share markets.
MCC drew a lot of attention from domestic and foreign investors in a run-up to the IPOs. Nevertheless, the stock closed at HK$ 5.52 on its first trading day September 24 in Hong Kong, down 13 percent from its opening offer.
Three days earlier on the Shanghai bourse, MCC stock followed the pattern of other recent Chinese IPOs by soaring 28 percent on opening day. But then the stock price plunged for four consecutive days. On September 25, the stock price closed at 5.83 yuan, only 8 percent higher than its opening offer of 5.42 yuan.
“The listing of MCC on the H-share market may mark a turning point for IPOs,” said Henry Cai, chairman and head of Asian investment banking at the securities firm UBS. “From now on, investors will be more selective toward IPO stocks.”
Speculation apparently was not a factor, since the short time period between IPOs on the H- and A-share markets left little room for risk-takers. One source said the IPOs were intentionally scheduled just days apart – not three months between, as MCC had originally planned -- in hopes of preventing a market price gap.
MCC President Shen Heting said he was not disappointed by the stock’s IPO performance. He told Caijing the price was reasonable, and he was confident about the company’s future.
“The baby was born, and both mother and son are safe,” said Shen.
Rationality Sets In
MCC is the largest engineering and construction company in China, and ranked 380th on the 2008 Fortune Global 500 list of companies in terms of revenue. It was established in December 2008, and its owners include steel giant Baosteel Corp.
MCC’s construction business is concentrated in the steel industry. Its property development, mining and equipment manufacturing sectors have rather low value assessments on the market.
Since MCC has businesses spanning four industries, investor evaluations apparently factored in discounts based on company diversity.
The total capital raised through the Shanghai listing was 18.97 billion yuan, while Hong Kong investors chipped in HK$ 18.23 billion during the H-share debut.
The initial offer price on the A-share market was 5.42 yuan, with a diluted P/E ratio (market value to earnings per share) of 22.36 – a ratio that some Hong Kong fund managers said was reasonable.
An MCC source said market conditions had determined the post-launch slump of the company’s stock prices. But investor testing played a role as well, especially on the Shanghai exchange.
Tang Zhigang, a strategic analyst with UBS, said every large IPO on the A-share market provides a major test for market confidence. Moreover, he said, China’s “domestic stock market is more speculative than that in Hong Kong.”
Now, according to Cai, 30 to 40 candidates are waiting in queue to launch IPOs on the Hong Kong exchange. UBS predicted that in the fourth quarter 2009, the bourse’ IPOs would raise a total HK$ 117 billion, making Hong Kong the world’s largest IPO market this year.
But the MCC debut may have cooled anticipation and now, Cai said, “investors tend to be more rational.”
Price Promises
MCC promised in its A-share prospectus that the offer price for its H-share stock would not fall below the A-share debut offer. So about two weeks before the Hong Kong launch, MCC announced a range for the A-share offer from 5 yuan to 5.42 yuan, and an H-share offer ranging from HK$ 6.16 to HK$ 6.81. Thus, based on the exchange rate, the lowest price in the H-share range was equal to the uppermost price for an A share.
Ever since China Railway Group (SSE: 601390, HKEX: 00390) listed on the A-share and H-share markets in 2007, Hong Kong stock debut prices had been higher than those in Shanghai.
In the case of MCC, however, a senior company manager said government policy was behind the promise for the initial H-share price to be set higher than that for A shares.
Policymakers wanted both IPOs to succeed, and protecting the interests of domestic investors who participate in the A-share IPO was of paramount concern, since H-share investors could already benefit from the H-share market’s stability.
An informed source said regulators required MCC to promise a more equal footing for prices. Following this direction was the lead underwriter for the A-share IPO, CITIC Securities. Morgan Stanley was the sole global coordinator for the H-share offer. Citibank, China International Capital Corp. and CITIC International were joint underwriters for the H-share offering.
As China’s leading investment bank, CITICS was in a good position to set a higher A-share offer. However, since H-share prices have been generally assessed below A-share IPO offers, A-share prices are supposed to be low enough to secure price stability after a stock debut.
Investors were indeed pleased to see MCC set a lower-than-expected offer price for the Shanghai debut which, when combined the company’s ample capital supply, contributed to the stock’s day-one popularity.
Impressive Fund-Raising
By raising as much as a combined 1.62 trillion yuan from retail and institutional investors in the two-pronged IPO, MCC became a leading global 2009 fund-raiser, second only to China State Construction’s (SSE: 601668) stock debut, which raised 1.85 trillion yuan earlier this year.
MCC’s Shen said global investors had shown keen interest in MCC as well as China’s economy during an international road show. MCC gained 100 percent response for its pre-IPO road show in Germany, 81 percent in London, and 50 percent in the eastern United States, clearly indicating that international investors had taken note.
Reflecting the enthusiasm was the fact that MCC received 204 times the number of applications available for its Hong Kong public offering and 10 times the applications for open slots in the international allotment.
Yet interest in MCC trailed that of another Chinese blue chip stock company with an IPO in Hong Kong earlier this year -- Sinopharm (HKEX: 01099), a medical products expected to benefit from China’s healthcare reform. Sinopharm received 569 times as many applications as available for its public offer. And its international applications were 30 times more than the allotment.
Chinese investors were the cornerstone for the successful IPOs of MCC as well as Sinopharm.
Sinopharm introduced five cornerstone investors for its H-share debut: CITIC Pacific (HKEX: 00267), Bank of China Hong Kong (HKEX: 02388), China Overseas Land & Investment Ltd. (HKEX: 00688), China Communications Construction (HKEX: 01800), and China Construction Bank International.
According to a senior investment banker, since the global financial crisis so-called “C-class” capital – rooted in China -- has been very active. In fact, this type of investment capital may replace Hong Kong capital in many areas, as China’s blue-chip investors play an increasingly important role in Hong Kong market investment. In addition, they are expected to play a larger role in all kinds of decisions related to investment and value assessment.
A source familiar with MCC’s IPO said many Chinese institutional investors expressed strong interest in the company. But they still had reservations about the future. They asked, “What would MCC do about a possible oversupply in the steel industry? How could the company tie together and complement its diverse business lines? How might MCC outperform its competitors in profit power?”
The source said underwriters including Morgan Stanley and Citibank promoted the company as an engineering services provider with strength in technology. The message was that it would integrate its principal businesses across four industries -- engineering and construction, resource development, equipment manufacturing, and property development -- and extend its industrial chain. Bankers framed this key message of technological capability as core competitiveness.
Shen said the company is strongest in metallurgical engineering and as a construction contractor, as these businesses represent 90 percent of the domestic market. No other competitor can boast such depth.
Its interests in property, resource and equipment manufacturing are derivatives. These businesses were listed as “main industries as required by the national statistics index,” said Shen.
Shen said that the company intends to use proceeds raised in the global stock offerings for six resource project acquisitions. The plan is to complete overseas projects within three years. In addition, Shen said, the company is currently evaluating many other overseas resource projects.
According to the company’s stock prospectus, MCC plans to use about 33 percent of its IPO proceeds to fund key overseas resource development projects, including the Aynak copper mine project in Afghanistan, the Sierra Grande iron mine project in Argentina, and the Duddar lead-zinc mine in Pakistan. Proceeds would be used to pay for mining rights as well as mine construction.
In addition, MCC plans to use about 45 percent of the proceeds to fund overseas construction projects, including an ESSAR Steel ballast furnace project in India, an expansion project by Thai Nguyen Iron and Steel in Vietnam, and a SINO iron ore mine construction project in Australia.
Nevertheless, these plans were not sufficient to allay institutional investor concerns. Prior to MCC’s IPOs, for example, two institutional investors expressed reservations about MCC’s complex business structure.
MCC also faces risks from oversupply in the steel industry, since its main business is building steel factories. And most of its resource development projects are in countries or regions where political stability is an issue.
But Shen’s only worries surround macroeconomic policy. Meanwhile, he’s content with the IPO results. “Good or bad,” he said, “the market will give the answer.”
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MCC Debut: Turning Point for China’s IPOs?
Dual IPOs that raised US$ 5.3 billion for Metallurgical Corp. of China could portend a big change for Chinese stock debuts.
By Wang Xiaolu and Wang Duan
07 October 2009
(Caijing Magazine) An era of rocket-fuel takeoffs for initial public offerings may be drawing to a close on the Chinese stock market.
Analysts said IPO investors may be coming back to planet Earth after the September debuts of Metallurgical Corp. of China Ltd. (MCC) on the Hong Kong H-share and Shanghai A-share markets.
Factory construction and resource conglomerate MCC (SSE: 601618, HKEX: 01618) was the first company in 10 months allowed by Chinese government regulators to simultaneously list on the A- and H-share markets.
MCC drew a lot of attention from domestic and foreign investors in a run-up to the IPOs. Nevertheless, the stock closed at HK$ 5.52 on its first trading day September 24 in Hong Kong, down 13 percent from its opening offer.
Three days earlier on the Shanghai bourse, MCC stock followed the pattern of other recent Chinese IPOs by soaring 28 percent on opening day. But then the stock price plunged for four consecutive days. On September 25, the stock price closed at 5.83 yuan, only 8 percent higher than its opening offer of 5.42 yuan.
“The listing of MCC on the H-share market may mark a turning point for IPOs,” said Henry Cai, chairman and head of Asian investment banking at the securities firm UBS. “From now on, investors will be more selective toward IPO stocks.”
Speculation apparently was not a factor, since the short time period between IPOs on the H- and A-share markets left little room for risk-takers. One source said the IPOs were intentionally scheduled just days apart – not three months between, as MCC had originally planned -- in hopes of preventing a market price gap.
MCC President Shen Heting said he was not disappointed by the stock’s IPO performance. He told Caijing the price was reasonable, and he was confident about the company’s future.
“The baby was born, and both mother and son are safe,” said Shen.
Rationality Sets In
MCC is the largest engineering and construction company in China, and ranked 380th on the 2008 Fortune Global 500 list of companies in terms of revenue. It was established in December 2008, and its owners include steel giant Baosteel Corp.
MCC’s construction business is concentrated in the steel industry. Its property development, mining and equipment manufacturing sectors have rather low value assessments on the market.
Since MCC has businesses spanning four industries, investor evaluations apparently factored in discounts based on company diversity.
The total capital raised through the Shanghai listing was 18.97 billion yuan, while Hong Kong investors chipped in HK$ 18.23 billion during the H-share debut.
The initial offer price on the A-share market was 5.42 yuan, with a diluted P/E ratio (market value to earnings per share) of 22.36 – a ratio that some Hong Kong fund managers said was reasonable.
An MCC source said market conditions had determined the post-launch slump of the company’s stock prices. But investor testing played a role as well, especially on the Shanghai exchange.
Tang Zhigang, a strategic analyst with UBS, said every large IPO on the A-share market provides a major test for market confidence. Moreover, he said, China’s “domestic stock market is more speculative than that in Hong Kong.”
Now, according to Cai, 30 to 40 candidates are waiting in queue to launch IPOs on the Hong Kong exchange. UBS predicted that in the fourth quarter 2009, the bourse’ IPOs would raise a total HK$ 117 billion, making Hong Kong the world’s largest IPO market this year.
But the MCC debut may have cooled anticipation and now, Cai said, “investors tend to be more rational.”
Price Promises
MCC promised in its A-share prospectus that the offer price for its H-share stock would not fall below the A-share debut offer. So about two weeks before the Hong Kong launch, MCC announced a range for the A-share offer from 5 yuan to 5.42 yuan, and an H-share offer ranging from HK$ 6.16 to HK$ 6.81. Thus, based on the exchange rate, the lowest price in the H-share range was equal to the uppermost price for an A share.
Ever since China Railway Group (SSE: 601390, HKEX: 00390) listed on the A-share and H-share markets in 2007, Hong Kong stock debut prices had been higher than those in Shanghai.
In the case of MCC, however, a senior company manager said government policy was behind the promise for the initial H-share price to be set higher than that for A shares.
Policymakers wanted both IPOs to succeed, and protecting the interests of domestic investors who participate in the A-share IPO was of paramount concern, since H-share investors could already benefit from the H-share market’s stability.
An informed source said regulators required MCC to promise a more equal footing for prices. Following this direction was the lead underwriter for the A-share IPO, CITIC Securities. Morgan Stanley was the sole global coordinator for the H-share offer. Citibank, China International Capital Corp. and CITIC International were joint underwriters for the H-share offering.
As China’s leading investment bank, CITICS was in a good position to set a higher A-share offer. However, since H-share prices have been generally assessed below A-share IPO offers, A-share prices are supposed to be low enough to secure price stability after a stock debut.
Investors were indeed pleased to see MCC set a lower-than-expected offer price for the Shanghai debut which, when combined the company’s ample capital supply, contributed to the stock’s day-one popularity.
Impressive Fund-Raising
By raising as much as a combined 1.62 trillion yuan from retail and institutional investors in the two-pronged IPO, MCC became a leading global 2009 fund-raiser, second only to China State Construction’s (SSE: 601668) stock debut, which raised 1.85 trillion yuan earlier this year.
MCC’s Shen said global investors had shown keen interest in MCC as well as China’s economy during an international road show. MCC gained 100 percent response for its pre-IPO road show in Germany, 81 percent in London, and 50 percent in the eastern United States, clearly indicating that international investors had taken note.
Reflecting the enthusiasm was the fact that MCC received 204 times the number of applications available for its Hong Kong public offering and 10 times the applications for open slots in the international allotment.
Yet interest in MCC trailed that of another Chinese blue chip stock company with an IPO in Hong Kong earlier this year -- Sinopharm (HKEX: 01099), a medical products expected to benefit from China’s healthcare reform. Sinopharm received 569 times as many applications as available for its public offer. And its international applications were 30 times more than the allotment.
Chinese Buyers
Chinese investors were the cornerstone for the successful IPOs of MCC as well as Sinopharm.
Sinopharm introduced five cornerstone investors for its H-share debut: CITIC Pacific (HKEX: 00267), Bank of China Hong Kong (HKEX: 02388), China Overseas Land & Investment Ltd. (HKEX: 00688), China Communications Construction (HKEX: 01800), and China Construction Bank International.
According to a senior investment banker, since the global financial crisis so-called “C-class” capital – rooted in China -- has been very active. In fact, this type of investment capital may replace Hong Kong capital in many areas, as China’s blue-chip investors play an increasingly important role in Hong Kong market investment. In addition, they are expected to play a larger role in all kinds of decisions related to investment and value assessment.
A source familiar with MCC’s IPO said many Chinese institutional investors expressed strong interest in the company. But they still had reservations about the future. They asked, “What would MCC do about a possible oversupply in the steel industry? How could the company tie together and complement its diverse business lines? How might MCC outperform its competitors in profit power?”
The source said underwriters including Morgan Stanley and Citibank promoted the company as an engineering services provider with strength in technology. The message was that it would integrate its principal businesses across four industries -- engineering and construction, resource development, equipment manufacturing, and property development -- and extend its industrial chain. Bankers framed this key message of technological capability as core competitiveness.
Shen said the company is strongest in metallurgical engineering and as a construction contractor, as these businesses represent 90 percent of the domestic market. No other competitor can boast such depth.
Its interests in property, resource and equipment manufacturing are derivatives. These businesses were listed as “main industries as required by the national statistics index,” said Shen.
Shen said that the company intends to use proceeds raised in the global stock offerings for six resource project acquisitions. The plan is to complete overseas projects within three years. In addition, Shen said, the company is currently evaluating many other overseas resource projects.
According to the company’s stock prospectus, MCC plans to use about 33 percent of its IPO proceeds to fund key overseas resource development projects, including the Aynak copper mine project in Afghanistan, the Sierra Grande iron mine project in Argentina, and the Duddar lead-zinc mine in Pakistan. Proceeds would be used to pay for mining rights as well as mine construction.
In addition, MCC plans to use about 45 percent of the proceeds to fund overseas construction projects, including an ESSAR Steel ballast furnace project in India, an expansion project by Thai Nguyen Iron and Steel in Vietnam, and a SINO iron ore mine construction project in Australia.
Nevertheless, these plans were not sufficient to allay institutional investor concerns. Prior to MCC’s IPOs, for example, two institutional investors expressed reservations about MCC’s complex business structure.
MCC also faces risks from oversupply in the steel industry, since its main business is building steel factories. And most of its resource development projects are in countries or regions where political stability is an issue.
But Shen’s only worries surround macroeconomic policy. Meanwhile, he’s content with the IPO results. “Good or bad,” he said, “the market will give the answer.”
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