Unlikely but true: China coal group in successful IPO

Coal may be an unloved commodity and IPO markets may be floundering, but a Chinese coal producer has just raised $900m in Hong Kong’s second-biggest new share sale this year.

Inner Mongolia Yitai Coal, the biggest coal group in the Chinese region bordering Mongolia, sold 162.8m shares at HK$43 (US$5.50) apiece on Friday, at the low end of a range marketed to investors, Reuters reported.

The deal is noteworthy as a rare success at a time when dozens of companies from Graff Diamonds to Formula One have been forced to scrap IPOs due to insufficient demand from investors.

The other unusual factor is that Yitai Coal will become the first company on the Hong Kong stock exchange that also has so-called “B shares”.

B shares, which are listed in Shanghai and traded in US dollars, are something of an oddity in China’s capital markets. Created in 1991 to give foreigners access to Chinese companies, the market has withered over the past decade thanks to regulatory neglect and because international investors gained access to the bigger, more liquid A-share market.

Yitai’s Shanghai-listed B shares closed at US$5.75 on Friday – almost 5 per cent above the price of its Hong Kong shares, which are due to start trading on July 12.

Raising $900m is quite an achievement in the current environment. Investors are hardly enamored with the coal sector, as coal prices tumble and coal inventories at Chinese ports hit record highs. Qinhuangdao, the world’s largest coal loading port, has inventories of 9.4m tonnes, close to maximum warehousing capacity.

To get its deal done, Yitai appears to have taken a pragmatic approach. The group scaled back its IPO ambitions, having previously planned to raise $1.5bn. Its shares were priced at a 2012 price-to-earnings multiple of 6.7 times, which analysts say is a reasonable valuation.

Moreover, Yitai managed to rope in cornerstone investors such as Baosteel, the Chinese state-owned steelmaker, to buy shares worth about $388m – equivalent to a whopping 43 per cent of the IPO.

Cornerstones, which sign up for a deal before it is marketed to public investors and agree to a six-month lock-up on their shares, have become an increasingly large presence in Hong Kong IPOs.

The Yitai deal suggests that while Hong Kong’s IPO market is down, it’s certainly not out.

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