The news: Jiangnan Group, a Jiangsu province-based maker of power transmission cables, will raise up to US$101.6 million (HK$788 million) in a Hong Kong IPO with its shares set to begin trading on Friday.
The significance: China has long suffered from an electricity gap – western China produces most of the country’s power while the Eastern coast consumes the most. To bridge the gap, the country needs vast amounts of the kind of power transmission cables that Jiangnan makes. The company counts some of China’s largest state-owned enterprises among its customers, including PetroChina, Sinopec, State Grid and Huainan Mining. Yet the IPO is undersubscribed despite these positive factors, most likely from negative sentiment on the overall direction of the Hang Seng Index. Presuming institutional investors make up for the lack of retail demand so that IPO can go forward, this may work to the benefit of potential investors looking to buy at a discount. Undersubscription will likely mean that Jiangnan prices at the bottom end of its range, giving a reasonable 5.75 price-to-earnings ratio. Investors should particularly consider buying Jiangnan if it drops below the IPO price in the first few days of trading as it is likely to rise in the long term based on fundamental demand for power cables.
The takeaway: Consider buying Jiangnan Group (1366.HKG) on demand for power transmission cables, especially if it prices at the low end of its range or if shares drop below the IPO price after they go on the market Friday.