Staying on trackThe US financial shockwaves have rocked equity markets in Asia, forcing potential new issuers to flee in panic as investors re-price stocks downward at dizzying speeds. That puts China Railway’s IPO (initial public offering) in November 2007 into sharp focus. When the deal was launched the Hang Seng Index was trading at 28,604, a far cry from the depths the markets plumeted – 14796.87 – as Emerging Markets went to press. And yet, China Railway’s was quoted at HK$4.82 compared with its offer price at HK5.78 – only a 16.6% fall. This resilient secondary market performance signifies just how much investors view the deal as an ocean of relative calm amid the global storm.
In fact, volatility has dogged regional stock exchanges since October last year when demand for Chinese shares hit its peak, and the resulting correction has frozen many new share sales. Hong Kong’s Hang Seng Index lost 9% in November, making it at the time the worst month for the index at that time since March 2004. The story was similar in Shanghai, where the benchmark index lost 18% of its value over the month. So when a queue of people formed outside the Des Voeux Road branch of Bank of China on November 23 – the first day of China Railway’s IPO (initial public offering) subscription period – the sight was especially telling. Joint global coordinators Bank of China International, JP Morgan and UBS had confounded expectations: the retail tranche of the offering closed 209 times oversubscribed, pricing high.
“People had begun to recognize that China will not be completely immune to a slowdown in the US, and export growth will no doubt suffer, but the infrastructure and domestic consumption related sectors will be able to take up that slack,” says Kester Ng, head of equity capital markets for Asia Pacific at JP Morgan in Hong Kong. “China Railway is the leader in its field, and ultimately the core strength of the equity story really stood out.”
China Railway Engineering split its equity issue between A-shares, listed in Shanghai, and H-shares in Hong Kong. Both were priced at the top of the indicated price ranges, with the Shanghai listing completed first, at the top of a Rmb4–Rmb4.80 per share price range. The H-share listing in Hong Kong was priced just a week and a half later at the top end of the HK$5.03–HK$5.78 range, making China Railway the first to list H-shares immediately after its A-share offering.
Bank of China and UBS underwrote the A-share listing and acted as bookrunners on both deals, while JP Morgan and ABN Amro joined as bookrunners on the H-share deal. All told, the dual listing gave China Railway a capital injection of $5.51 billion, rising to $5.88 billion after the exercise of an over-allocation option in Hong Kong later in December.
First Chance
“Even though the market had turned a bit choppy, China Railway Engineering was the first opportunity for equity investors to own a Chinese railroad builder,” explains Steven Barg, head of equity capital markets for Asia at UBS in Hong Kong. “People took the view in November that things could deteriorate further, and viewed this as a good Chinese macro play and a safe asset to own.”
While the Shanghai issue was slightly larger, accounting for 55% of the total issued, the Hong Kong listing was key to China Railway’s strategy of attracting international capital: a sizeable portion of demand for the H-shares came from outside the region. More than 1,000 institutional investors placed orders for 40 times the number of shares on offer to them, with 70% of the orders coming from Asia, 20% from Europe, 8% from the US and the remaining 2% from the rest of the world. “We had a very deep and robust book, and the deal gave China Railway the prestige of a big dual listing, as well as a large capital injection and access to two different markets,” says Barg at UBS.
One feature that helped China Railway calm investors’ nerves was the presence of well-known names, so-called cornerstone investors. The cornerstone tranche, often referred to as the tycoon tranche for the regular participation of a number of high net worth individuals, has become a key element of Hong Kong IPOs. It is often used first as a means to decrease execution risk and later to reward regular and big investors with guaranteed allocations.
Funds owned by the Hong Kong property tycoons behind Henderson Land, Kerry Properties, Sun Hung Kai Properties and Wharf Holdings all took HK$800 million of shares, as did China Life Franklin, the Government of Singapore Investment Corp, hedge fund Och-Ziff and Leslie Lee Alexander, owner of the Houston Rockets basketball team.
But the deal also benefited from a big strategic investment from China Investment Corp (CIC), the sovereign wealth fund established in mid-2007 to invest a portion of China’s foreign exchange reserves abroad. It was only the second time CIC had invested directly in an IPO, following its $3 billion stake in US private equity firm Blackstone earlier last year. “The additional reassurance that comes with having brand names behind this was important,” says Barg. “Volatility was becoming a concern, and the cornerstone investors helped add some real momentum.”
The hordes waiting outside Bank of China that November morning, the first day of the subscription period, were not disappointed. China Railway’s Hong Kong shares jumped nearly 30% on their trading debut, after a 68% first day rise in Shanghai. The H-shares bucked the falling market trend and were still 30% above the offer price at the end of March, making it the most successful Hong Kong IPO of the previous six months.
“The success of the deal was not a big surprise,” says Ng at JP Morgan. “China’s rail infrastructure is underdeveloped, and the government is investing trillions of dollars in the sector. The equity story almost tells itself.” With the construction giant announcing in April that 2007 profits jumped 92%, its shareholders have clearly picked a company with strong fundamentals. But it just remains to be seen whether the stock can continue to hold on amid this global market abyss.