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Friday, 18 April 2014

Citic Heavy IPO draws cautious response

EQUITIES Demand from institutional and retail investors not particularly strong, as appetites still weak

The cautious response to the Shanghai IPO last week of Citic Heavy Industries shows investors are still reluctant to buy into sizable deals. This is after China launched a series of measures to boost investor confidence and establish a more market-based pricing mechanism.

As the first sizable IPO in the past four months, Citic raised Rmb3.20bn (US$502m), about 22.56% lower than its initial target, from its Shanghai IPO of 685m shares.

Demand from institutional and retail investors for the deal was not particularly strong, as appetites for IPOs remained weak. The institutional and retail tranches were only 1.59 and 19.84 times covered, respectively, before claw back.

Bankers on the deal think the outcome is acceptable. “It’s quite successful. Selling a big-cap deal is definitely not easy under the current market conditions. Given its size, the subscription rate is actually not too bad,” said a banker on the deal.

Citic’s deal indeed reflects how difficult it can be to complete a sizable transaction in tough markets. The company offered its shares at a fixed price of Rmb4.67 per share, or at a 2011 P/E of 16.19. The price represents a discount of 18.93% to the average valuation of Citic’s listed peers in the equipment-manufacturing sector.

Still, of the 134 accounts that participated in Citic’s IPO pricing consultation, only 25 were willing to pay more than the offer level. The 25 accounts were also the final buyers of the institutional tranche because, according to China’s IPO rules, investors who do not participate in pricing consultations are not allowed to subscribe the shares in the bookbuilding stage.

Falling markets and the fact that Citic was the first Shanghai IPO to use the new pricing mechanism were the main reasons for bids at low prices.

Some investors already started to worry about Citic’s aftermarket performance. “The price is much lower than our bids, so we thought the valuation is reasonable. However, we were surprised to learn how low other investors had bid and are now very worried about the aftermarket performance,” said a fund manager whose firm bought Citic’s shares.

“The issuer and underwriters must take good care of Citic’s aftermarket performance. Otherwise, we may not buy any deals the same underwriters arrange again in the future,” added the fund manager.

After the clawback, six strategic investors took up 120m shares of the deal, while institutional and retail investors bought 113m and 452m shares, respectively.

Zhong De Securities was the sponsor of the IPO and joint bookrunner with Citic Securities. Proceeds will be used for three equipment-manufacturing projects.

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