This resulted in a total deal size of $172.8 million û of which the company itself pocketed $144 million. While this was close to 29% less than the maximum it had initially hoped to raise, the decision to set the price below the range looks to have been the right one deeming from the New York trading debut overnight. The stock traded up as much as 9.2% to an intraday high of $10.48 within the first hour, but then fell back again, never reaching the bottom of the original price range.
It closed 2.6% above the IPO price at $9.85 after a reasonably active session that saw 42% of the IPO shares change hands. It was a volatile day it the rest of the market too with the Dow Jones index initially trading higher, then below the previous dayÆs close for a couple of hours around midday, only to climb into positive territory during the final two hours. However, a late dip saw the index close down 0.2%.
æThis is a good company and a good story, but it is coming very late in the year and the management wanted to avoid a decline on the first day, which has been the fate of some other recent newcomers,ö one source says with regard to the pricing.
Indeed the backdrop wasnÆt the best with the US market falling 8% during the roadshow. However, Gushan, which is privately owned, needs money to expand and since most of the shares were new shares, the management was willing to live with the lower price. The need for capital was also the reason, sources say, why the company pushed its luck by coming to the market so late in the year. Had it decided to wait, the next window wouldnÆt have opened until March when its full-year accounts have been audited, and given the volatile state of the equity markets, and indeed of the biodiesel sector, it felt the better option was to use the opportunity to list now.
The deal comprised 18 million American depositary shares (ADS), or 21.6% of the company. Of the total, 15 million ADS were backed by new shares, while the other 3 million were sold by existing shareholders. None of those selling shares as part of the base deal was a company director or part of the management, although some of them will be reducing their holdings if the 15% greenshoe is exercised. Each ADS accounts for two ordinary shares.
The company had set aside up to 1.44 million ADS, or 8% of the base offering, for directors, employees or associates of the company.
According to a source, the Merrill Lynch-led deal attracted about 80 investors and more than $400 million of demand, or about 2.3 times the final deal size. Unusually for a US listing, Asian investors accounted for 40% of the demand (although some of that may have come from the Asian arms of US firms), while 30% came from the US and 15% each from the Middle East and Europe.
The final price valued the company at 11 times its projected 2008 earnings, or at an enterprise-value-to-Ebitda of 7.3 times. Investors said there werenÆt that many direct comparisons, but at the reduced IPO price it is at least in line with US-listed Aventine Renewable, which is a smaller player with a market cap of about $500 million. For US-based investors this was likely important as they would not have been too keen to pay extra for an untested newcomer in the current volatile markets, even if it has a stronger growth profile.
The company also flagged in its prospectus that it is expected to post a decline in net income this year from the Rmb332.8 million ($44.4 million) it achieved in 2006. The reason is that it has to account for a non-cash interest expense of Rmb109.2 million in the fourth quarter, which is related to the conversion of a convertible note issued in 2006. The bottom line expanded at a compound annual growth rate of 111% between 2004 and 2006. Gushan reported a net profit of Rmb250.1 million ($33.4 million) in the nine months to September 2007.
Investors liked the company because it is the largest biodiesel producer in China in terms of annual production capacity and an early mover in the industry, having started its business in 2001. Gushan is also in the process of more than doubling its annual capacity from 190,000 tonnes today to 400,000 tonnes by the end of 2008 through the construction of four new production facilities in Beijing, Shanghai, Hunan and Chongqing. It currently has three facilities in the Sichuan, Hebei and Fujian provinces.
ChinaÆs annual consumption of biodiesel, which is renewable, clean-burning and biodegradable, is expected to reach 2 million tonnes by 2020, by which time renewable energy is also expected to account for 15% of the countryÆs total energy consumption û up from approximately 7.5% in 2005. But the demand could be even greater if ChinaÆs current guideline that each unit of diesel sold should contain at least 20% biodiesel (mixed with 80% petrodiesel) is made into law.
The company uses no virgin oil as a basis for its biodiesel, but rather buys vegetable offal oil and used cooking oil, which is in huge supply after China banned the dumping of used oil. Its customers include direct users such as shipping companies, as well as petroleum wholesalers and retail gas stations.
Gushan ends a busy period for Merrill Lynch, which has been involved in raising capital for 11 companies over the past 15 trading days û a noteworthy achievement given the volatile markets, which has forced several IPOs to be postponed both in Hong Kong and Singapore. The deals include four IPOs for the following: Xinyuan Real Eastate, the first Chinese property company to list in the US; Indian shipping company Mercator Lines, which listed in Singapore; on-screen advertiser VisionChina Media which came to market in the US; and VanceInfo Technologies, which was the smallest of the lot with a $65 million US listing.
In addition, the bank has also helped sell a combined follow-on and convertible bond issue for Yingli Green Energy Holdings; a CB for Chinese budget hotel operator HomeInns; and a QIP for Indian wind turbine generator maker Suzlon Energy
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