Sinopec Engineering Debut Fizzles, Casting Doubt on Hong Kong IPO Recovery

Mike Clarke | AFP | Getty Images

Sinopec Engineering made a lackluster market debut on Thursday after raising $1.8 billion in Hong Kong's biggest IPO this year, casting doubt on a nascent recovery in IPO issuance in the city as investors remained cautious because of a weaker local stock market.

The initial public offering by Sinopec Engineering (Group), a unit of China's largest refiner, has been closely watched by other companies planning to tap capital markets. On Wednesday, China Galaxy Securities gained 6 percent in its Hong Kong debut after raising $1.1 billion last week, reviving hopes for a recovery in an IPO market that had trailed countries including Iraq in issuance earlier this year.

But Sinopec Engineering shares fell to HK$10.46 in early afternoon trade compared with the IPO price of HK$10.50, after opening higher at HK$10.70. The deal was priced near the bottom of an indicative range of HK$9.80-HK$13.10 per share last week.

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The benchmark Hang Seng index was down 1.6 percent in early afternoon trade, its third straight day of declines, weighing on Sinopec Engineering and sentiment towards IPOs.

"The market dropped too much today. In the IPO period, people seemed interested in the stock, but now it's below the offering price," said Alvin Cheung, associate director at Prudential Brokerage in Hong Kong. "It heavily depends on the market, if the markets keep going down, people won't be as interested in the IPO markets."

The mixed debuts for China Galaxy and Sinopec Engineering underscore the fickle nature of capital markets in the city, where sentiment is driven heavily by retail investors.

Retail investors' demand for both deals was nearly 30 times the number of shares on offer. The two IPOs were priced near the bottom of expectations, in a bid to stoke appetite from bargain-hunting investors.

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IPO Volumes

Hong Kong, the top global IPO destination for two years straight in 2009 and 2010, had lingered in 13th place in global rankings behind countries like Iraq and New Zealand, before the offerings by China Galaxy and Sinopec Engineering.

The two offerings lifted Hong Kong IPO volumes to $3.9 billion through late May, catapulting the island city to third place among global exchanges, behind New York's $12.6 billion and Sao Paulo Bovespa's $6.5 billion, according to Thomson Reuters data.

Also this week, Langham Hospitality Investments, an investment trust that owns three upscale Hong Kong hotels, will price its up to $590 million IPO later on Thursday and autoparts maker Mando China Holdings will set the final price for its up to $270 million listing on Friday.

Sinopec Engineering secured commitments for $350 million worth of shares from seven investors including logistics and transportation company China Shipping (Hong Kong) Holdings and units of China Aerospace Science and Technology.

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Sinopec Engineering is controlled by China Petrochemical Corp, the state-owned integrated oil behemoth also known as Sinopec Group that is also the parent of China Petroleum and Chemical.

Citic Securities, JPMorgan and UBS were hired as sponsors of the Sinopec Engineering offering, with Goldman Sachs also acting as a joint global coordinator on the deal. A group of nine other banks will also help manage the IPO as joint bookrunners.