Tycoon effect expected to spur investor rush for Hidili shares
With local tycoons lining up to buy its shares and solid growth in the mainland coal industry, Hidili Industry International Development is expected to be this month's most popular initial public offering in Hong Kong.
The Sichuan-based coal and coking coal producer, which hopes to raise as much as HK$4.1 billion, kicked off its international roadshow last Monday. By the end of the week, it reportedly had received orders for 10 times more shares than on offer.
Buoyed by stellar economic growth and surging demand for coal to generate power and refine steel, Hidili is the latest mainland company to attract money from some of the city's super-rich. It brought in four tycoons as cornerstone investors, including Chinese Estates Holdings chairman Joseph Lau Luen-hung, Bank of East Asia chairman David Li Kwok-po, Henderson Land Development chairman Lee Shau-kee, and Kerry Group's Robert Kuok.
Each subscribed to US$20 million worth of shares, which have a lock-up period of six months.
Mr Lee has been particularly keen on pouring money into new mainland share offerings this year, investing in Fosun International, KWG Property Holding and China Molybdenum.
The Hidili issue was launched at an indicative price range of HK$5.05 to HK$6.65, but the company raised the upper limit to HK$6.83 given the reported oversubscription of the institutional tranche.
UBS is sole bookrunner and lead manager for the offering.
Investing in the coal industry is not risk-free - the mainland has an appalling safety record with frequent fatal accidents caused by explosions or flooding. Competition also is expected to grow, with the government ramping up renewable fuel use over the next few years.
'The valuation is slightly beyond my expectations and I think the tycoon effect prompted the firm to price the shares higher,'' said Ricky Tam, a director of Champlus Asset Management. 'The company should enjoy high growth given strong domestic demand for coking coal.
'Still, the government is encouraging the development of the renewable energy sector, which could lead to a decrease in coal consumption.'
The retail tranche, which accounts for 10 per cent of the share offering, opened for subscription yesterday and will run until Thursday. Trading will begin on September 21.
On the first day of the retail offering, four brokerages provided a total of HK$16.8 billion in margin loans to buy the shares, or more than 40 times the amount available under the retail portion.
'I estimate that the offering will eventually be more than 300 times oversubscribed,' said Kingston Lin King-kam, an associate director at Prudential Brokerage. 'As the stock market has reached a high level recently, investors prefer IPOs, which are less risky.'
Mainland coal companies are already well on the radar screen of Hong Kong investors, with the fuel accounting for 70 per cent of the energy needs of the world's fastest growing major economy.
Three domestic coal miners listed in Hong Kong - China Shenhua Energy, China Coal Energy and Yanzhou Coal Mining - have all outperformed the Hang Seng Index this year.
Unlike its peers, Hidili is principally engaged in coking coal production, mostly used for steel and iron. The other three Hong Kong-listed coal companies primarily produce thermal coal for power stations.
That could give Hidili an edge, with UBS expecting mainland steel production to climb by as much as 12 per cent from this year to 2009.
'Margins for coking coal are much higher than thermal coal,' said Kenny Tang Sing-hing, an associate director of Tung Tai Securities
USB said Hidili also enjoyed low transport costs, with its major customers located nearby in southwest China. New steel capacity could especially drive coal demand in that region in the next three to four years.
Hidili, originally a privately owned producer, operates 14 coking coal mines in Sichuan province with reserves of 179 million tonnes.
It forecast net profit of not less than 460 million yuan for this year. Last year, earnings rose 72.4 per cent to 382.3 million yuan.
Ben Kwong, the chief operating officer at KGI Securities, said the tycoon effect could help boost retail subscription but the company would face risks in any economic downturn.
' Hidili may be exposed to cyclical risks in the sector,' Mr Kwong said. 'It is relatively small but has a relatively high price-earnings ratio compared with publicly listed peers.'
In a bid to meet expansion, the company acquired five mines under development in Guizhou province in the first half. It will start production in the second half.
It also has signed letters of undertaking to acquire as many as 11 other coal mines after the completion of the share offering.
'The government's policy to consolidate the steel and coking coal industries will benefit Hidili and other larger players,' said a fund manager at a Japanese asset management firm. 'The anticipated acquisitions should be another driver for growth, helping it maintain low operating costs.'
Hidili is offering 600 million shares with an option to expand that by an additional 90 million shares, depending on demand.
Even before the offering, Hidili was attracting headlines, with a controversial advertisement from an unknown 'shareholder' last week offering to sell 20 million shares and prompting a securities watchdog investigation.
Hidili chairman Xian Yang yesterday denied any connection the company had with the advertisement.
What the analysts think
Ricky Tam, director, Champlus Asset Management
Pros: Hidili is located near coal mines, enabling it to save on transport costs
Cons: The government is encouraging the development of the renewable energy sector, which could lead to a decrease in consumption of coal resources and dampen demand
associate director, Tung Tai Securities
Pros: The margin of coking coal is much higher than thermal coal
Cons: The company is purely a private enterprise and will not benefit from asset injections by its parent firm, as with other state-owned enterprises
chief operating director, KGI Securities
Pros: The tycoon effect could help boost retail subscription
Cons: The company may be exposed to cyclical risks in the sector. It is relatively small but its price-earnings ratio is relatively high compared with other listed rival firms