CCC prices IPO at top, despite shortfall

At a time when investors are calling for urgent reforms to China’s IPO system, Hong Kong-listed China Communications Construction added to the controversy last week. The company priced its scaled-back Shanghai IPO at the top of its target range, even though the book was undersubscribed.

CCC will raise Rmb5bn (US$793m) at the final price. However, the six banks on the deal have been forced to spend Rmb552m to take up the 102.3m unsold shares – the first time underwriters have had to take up leftover shares in a Chinese IPO since the price consultation process was introduced in 2005.

“Their decision certainly casts a shadow on the aftermarket performance of the stock, as there is low demand for the shares”

It is understood that most of the unsold shares will end up with lead underwriters BOC International (China), Citic Securities and Guotai Junan Securities. Bookrunners Goldman Sachs Gao Hua Securities, UBS Securities and Zhong De Securities will take up the remainder.

CCC’s unusual decision has added to a debate that is already raging in China’s IPO market, in which investors have blamed unrealistic valuations for heavy losses on a string of recent listings.

Some praised CCC for holding its underwriters to their commitments, saying the case would help to stop IPO arrangers from over-promising. Others, however, criticised the issuer for raising money at a price that obviously lacked institutional support, which might result in a disastrous trading debut.

“Their decision certainly casts a shadow on the aftermarket performance of the stock, as there is low demand for the shares,” said an investor who participated in the price consultation process but did not make a bid during bookbuilding.

“We are very surprised about the final pricing, indeed,” said an institutional investor who bought a large number of CCC’s IPO shares.

Despite all the criticism, bankers on the deal believed it was fair to price at the top of the guidance range in view of the reasonable valuation and the overwhelming demand from retail investors.

“The issuer insisted on pricing the deal at the top. [But] even at that level, it was cheap,” said a banker.

CCC priced its shares at Rmb5.40 apiece, valuing the company at 7.83 times 2011 earnings, or at a discount of more than 10% to its listed peers. It had offered the stock at Rmb5.00–Rmb5.40. The retail tranche of the offering soaked up huge subscriptions, with orders reaching Rmb174.2bn. Individual buyers were allotted only 1.71% of their orders.