The price range has been set at HK$2.70 to HK$3.65 a share. The company is selling 25% of its enlarged share capital in the form of 650.84 million shares, all of which are primary. There is a 15% greenshoe, which could bring another 97.5 million shares into the deal and raise the total proceeds to $350 million. The institutional tranche takes up 90% of the deal, with the remaining 10% earmarked for retail investors
Shanshui is the second largest cement producer in China in terms of sales and volume, and it is the market leader in Shandong and Liaoning with a market share of 16% and 8% respectively. The company plans to increase its market share in both provinces to 20%.
It currently produces nearly 35 million tonnes of cement a year, which is expected to reach 50 million tonnes by 2009. Shanshui is one of 12 Chinese cement producers that can expect government support when engaging in mergers and acquisitions. This means that the increase in capacity will not only come from improving its current plants, but also from buying smaller players in the highly fragmented cement industry. One syndicate research report predicts that the company has Rmb2.5 billion ($320 million) of leveraging capacity, which can be used to buy 7 million-8 million tonnes of extra annual production capacity.
Investors will be comparing Shanshui with China's other cement producers, such as Anhui Conch Cement and Asia Cement. The latter listed as recently as May 20 and gained 38% on the first day û the best trading debut among the Hong Kong IPOs this year. However, since Shanshui's premarketing began two weeks ago, on June 2, Asia Cement's shares have fallen 24% and Anhui Conch has seen a drop of 15%. The Hang Seng Index has lost 7.9% over the same period.
The price range values Shanshui at a price-to-earnings ratio of between 13 and 18 times, based on projected 2008 earnings. This puts it at a deep discount to Anhui Conch, which is currently trading at 23 times its estimated 2008 earnings. Asia Cement, which closed 9.2% above its IPO price on Friday, is trading at 16.8 times.
Investors hoping to see Shanshui pull off a similar gain to that registered by Asia Cement on its trading debut might be disappointed because the circumstances are completely different, says a source. Asia Cement priced just days before the earthquake that devastated Sichuan last month, and it is well placed to provide materials for reconstruction since it has a plant in the area that was not damaged by the disaster. Cement is very much a regional industry and the distance between Shanshui's plants and Sichuan makes it not feasible for it to provide for the region. Also, the government has put price caps on cement being used in the reconstruction to stop companies from profiting from the event.
Shanshui's fundamentals are promising: its earnings are expected to quadruple from 2007 to 2009 as its sales volume increases from 21.7 million to 44.8 million tonnes. Its income per tonne is expected to nearly double over the same period.
One concern is power, which is the company's primary expense. The local power producer in Shandong Province increased power tariffs for peak hours by 13% this week and a prolonged hike in prices could eat into ShanshuiÆs margins.
Bookbuilding will continue until June 26, when the price will be set. The trading debut is scheduled for July 4. The deal is being arranged by Credit Suisse and Morgan Stanley.
Also in the news is the resurrection of SJM Holding's IPO. A listing of the Macau-based casino operator has been in the pipeline for a number of years, but has been plagued by dynastical legal issues. Earlier this year it was ready to go ahead, but had to pull out at the last minute due to questions from the regulator. Sources have confirmed that Deutsche Bank has started holding investor meetings and that new research has been published.
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