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Sunday, 19 November 2017

2000: PetroChina: Let it flow

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PetroChina’s IPO in April 2000 opened the floodgates for jumbo Chinese state-owned enterprises looking to access overseas equity capital. In proving investors would support a major listing in H-share format, the deal paved way for the many IPOs of Chinese lenders and insurers that would transform the Hong Kong market in the years to come.

H shares, Hong Kong stocks from Chinese companies incorporated on the mainland, first emerged in 1993 when Tsingtao Brewery led a batch of nine SOE listings in the city.

It was not until April 2000, however, that PetroChina emerged with the first sizable H-share listing – a US$2.89bn Hong Kong and New York IPO.

The deal came against a very challenging backdrop. Oil prices were in decline and the dotcom boom meant that every investor was chasing the next big internet IPO.

“No one wanted to buy an oil stock. They said it’s a sunset industry. Everybody wanted to buy tech stocks at the time,” said Mark Machin, who worked on the deal at Goldman Sachs. “We even created an ecommerce entity within PetroChina to try to catch some attention and that was not really that helpful.”

The deal also drew an unusual amount of opposition in the US from labour unions, religious groups and even Tibet activists. The Securities and Exchange Commission was under huge pressure to stop the IPO.

Bookbuilding proved a headache.

“It got stuck at a very difficult spot. We had very little room on pricing as it was very close to book value. Only at the very last minute, we got one big institutional order in the US which finally allowed us to cover the book,” said Machin.

The offer of 17.6bn shares priced at HK$1.28 each, almost at the bottom of the marketed HK$1.24 –$1.51 range. The American depositary shares were priced at US$16.44 each.

The real nightmare, however, began after the deal priced. A couple of high-net-worth individuals in Hong Kong withdrew their orders after pricing. Luckily, Goldman and joint global coordinator and joint bookrunner CICC managed to find home for the unsold shares and dragged the deal across finish line.

“This one could have failed. It would have set back SOE reform in China for years. If the deal hadn’t closed, I am not sure China would run forward the way it did,” said Machin.

Six months after the PetroChina listing, China Petroleum & Chemical Corporation (Sinopec) listed H shares in Hong Kong in October, 2000. A long list of Chinese financials, including the Big Four lenders and top insurers, have listed in the city since then.

At the end of June 2017, there were 246 H-share companies listed on the Stock Exchange of Hong Kong with a combined market capitalisation of HK$5.82trn (US$746bn), according to data from the stock exchange. In total, there were 2,034 listed companies in Hong Kong at the end of June, with a market cap of HK$28.7trn.

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