While China's growth offers a positive macro story for such ports deals, in this particular case, investors will have to balance this against a particular concern related to Tianjin port itself - the fact that the Hong Kong listed entity will face competition from a separate A-share listed entity (more on this later).
Like Dalian Port, Tianjin Port is located in the Bohai Rim region in the Northeast of China which has been singled out by the government as a key focus for economic and social development in the next five years. This should lead to increased production by companies in the region, which will boost the demand for transport and shipping and thus benefit Tianjin PortÆs container and cargo handling businesses, or so the argument goes.
The listing candidate is about to increase its capacity by participating in the construction of a new container-handling terminal through a 40% stake in a joint venture together with two undisclosed international port operators.
The company derives more than 80% of its revenues from the container business, although it does also have a non-containerised cargo handling capacity of 240 million tonnes per year, which deals with all types of bulk cargo except for oil. Dalian Port, by comparison, has a large oil handling business, which the underwriters used as a key selling argument for the IPO.
Unusually for a proposed Hong Kong listing, Tianjin Port has announced indicative terms for its offering before pre-marketing has even started, somewhat reducing the flexibility for joint bookrunners CLSA and ABN AMRO Rothschild. The reason, according to market sources, is that the stock exchange insisted upon existing shareholders of parent company Tianjin Development Holdings having information about the suggested price and valuation ranges when they vote whether to approve the proposed spin-off on May 8.
However, according to sources close to the deal, the published price range and valuations are not set in stone and can still be changed depending on the response during pre-marketing.
Based on a release by the parent company, Tianjin Port will sell 578 million new shares, or 34% of its enlarged share capital, at a price of HK$1.50 to HK$1.83 apiece. About 61.2 million of the shares, or 10.6% of the total share sale, have been earmarked for shareholders of Tianjin Development at a ratio of one IPO share for every 15.6 existing shares in the parent company. Another 10% has been set aside for retail investors, leaving about 79.4% for institutional investors.
There is a 15% greenshoe, which may boost the total deal size to HK$1.22 billion ($157 million), based on the numbers given by the parent company. Like its parent company, Tianjin Port will also list as a red-chip.
The indicative price range would value the company at 18-20 times its 2005 earnings, which is slightly above the 17.9 times commanded by Dalian Port. The latter priced its $279 million IPO at the top end of the range over the weekend after strong demand from both retail and institutional investors.
Xiamen Port, which operates a dedicated container port just north of the Pearl River Delta, trades just around 20 times after gaining 40% since its listing
Based on syndicate forecasts, Tianjin PortÆs PE ratio will fall to 13.5-16.5 times when looking at its 2006 net profit, which is expected to increase to between HK$185 million ($23.8 million) and HK$190 million. In 2005, the company posted a pre-tax profit of about 147.3 million, up 90% from the previous year, according to figures provided by its parent company.
The company operates one dedicated container terminal which comprise four out of the 13 container handling berths at TianjinÆs port and through a separate wholly-owned subsidiary it operates a general cargo terminal with nine berths. Of those, two have been combined into one single container berth which focuses on smaller container ships, six handle general cargo and one serves as a grain handling terminal.
Together this makes Tianjin Port the fourth largest port operator in China and the ninth largest globally with a container capacity of 4.8 million twenty-foot equivalent units (TEU) per year and 240 million tonnes of bulk capacity.
The construction of the new joint venture container terminal at the Beigangchi area of TianjinÆs port will boost the companyÆs existing handling capacity by 37.5% or 1.8 million TEU per year. Tianjin Port is planning to use HK$577 million, or 64% of the HK$902 million in net proceeds it will receive if the IPO is priced at the mid-point of the indicative price range, towards the financing of this new terminal.
The remaining HK$325 million, as well as any additional net proceeds - if the IPO price is fixed at a higher level or the greenshoe is exercised - will be used to pay for the acquisition of two berths, railways, storage space on the quay, various other ancillary buildings and warehouses as well as the 1.37 million square metre piece of land they are situated on. The seller is Tianjin Port Group û a wholly state-owned holding company of the businesses previously owned and operated by the Tianjin Port Authority.
All of these facilities have previously been leased and are essential to the companyÆs current day-to-day operations and the acquisition will help the company to further delineate its business from that of Tianjin Port Group.
For the same reason, the listing candidate will also terminate other long-standing agreements between Tianjin Port Group and its parent Tianjin Development, including certain services it received from the port authority and pre-emptive rights with regard to new developments and investments at the port. Since the services are no longer needed and the parent company has never used the pre-emptive rights, the termination will have no adverse effect on the group, according to a statement from the parent company.
However, investors are likely to ask questions about the fact that Tianjin Port Group û essentially the port authority û also owns part of an A-share listed company, which operates the remaining berths at Tianjin port and is a larger entity with a market cap of about $1 billion. Tianjin Port will have a market cap close to $400 million at the time of listing.
ôCertainly the stock exchange had some concerns about the fact that there are two listed companies in the harbour that the government can sell future projects to, which is why it took three times to pass the listing hearing,ö one market source said. ôHowever, I think there are enough assets and growth in the area to justify two listed companies,ö he added.
Because of the governmentÆs plan to reinvigorate the entire Northeast region, which already account for about 18% of ChinaÆs GDP, Tianjin Port is largely a top-down story and it is entirely feasible to see the kind of rapid growth over the next few years that took place in ShanghaiÆs Pudong district in the 1990s, one observer said.
ôAt the same time you have a bottomsÆ up story with the companyÆs existing terminals growing nicely, the addition of the 40% joint venture and the potential for other asset injections at the port,ö he said.
The company is planning to commit to a certain dividend payout which is likely to be somewhere around 30-40% of net profit, although the final decision on the size of the commitment has yet to be taken, according to sources.
Assuming that Tianjin DevelopmentÆs existing shareholders approve the spin-off, a formal roadshow is expected to be launched around May 8 or 9 with the aim of a trading debut towards the end of May.
¬ Haymarket Media Limited. All rights reserved.
