Shenguan Holdings IPO to raise up to $160 million

Shenguan Holdings (Group), a Chinese company that makes the edible coating for sausages, launched an institutional roadshow on Friday for an initial public offering that is seeking to raise as much as HK$1.24 billion ($160 million). The company is raising capital to expand its overworked production facilities.

Shenguan is offering 400 million shares at an indicative price range of between HK$2.10 and HK$3.10. A 15% greenshoe, if fully exercised, could increase the final deal size to as much as $184 million.

The company is in a rather niche industry: it is a manufacturer of a collagen coating used to case sausage meat -- in other words, the skin of the sausage. With 106 production lines producing 2,417 million metres of casing a year, it is the largest company of its kind in China. Its production facilities are located in Wuzhou, a city in Guangxi province, and it has a patent on its casing products.

In 2008 the company's revenue was Rmb454.1 million ($66 million) and, in the first six month of 2009, it brought in Rmb317.2 million. Over the past few years, coatings for western-style sausages have accounted for a greater proportion of the company's revenue than coating for Chinese sausages. In 2008 western sausages accounted for 87.5% of its revenue, up from 68.8% in 2006. More than 90% of the company's revenue is derived from China, primarily from the nation's major sausage manufacturers. The remaining sales come from the US, Malaysia and South America.

There's plenty of demand for sausage coating material. The company's facilities are running at full steam and it is looking for capital to expand. More specifically, Shenguan intends to use 60% of the money raised in the IPO for the construction of new facilities, which should be up and running by the end of 2010. The 50 new production lines that are planned will increase capacity by 40%.

The rest of the money will be used for research and development, acquiring new land, repaying bank loans and repaying existing shareholders. After all that is paid for, 15% of the money raised will be kept as working capital.

Since Shenguan works in such a specialist industry, investors need to go far afield to find companies to compare it to. There is Spain's Viscofan, which is currently trading at 12.4 times 2009 projected earnings, and there is also UK-based Devro, which is trading at 12.7 times 2009 projected earnings. Shenguan's price range values the company at between 10.6 and 15.6 times its 2009 earnings.

Macquarie is the sole global coordinator on the IPO and a joint bookrunner together with China Merchants Securities. The deal is expected to price on October 7, with the listing scheduled for October 13.