Asia Cement spin-off prices above the low end

The final price of HK$4.95 represents a 36% discount to the company's larger competitor Anhui Conch Cement, but some investors hold off with the aim of buying in the secondary market.
Asia Cement (China) Holdings has raised HK$1.86 billion ($238 million) ahead of its listing in Hong Kong on May 20 after fixing the price slightly above the bottom of the indicated range. If the greenshoe is also used in full, the proceeds will increase to $274 million.

Coverage ratios are still well below where they were in the second half of 2007, but the fact that there was enough response from institutional investors not only to get the deal done, but to push up the price as well, was encouraging and should help improve the confidence of other companies in the pipeline to launch their deals. Contrary to the other two Hong Kong IPOs that closed last week, Asia CementÆs retail tranche was also fully subscribed, which means retail investors took 10% of the offering.

The price was set at HK$4.95 compared with a range of HK$4.85 to HK$6.45. Looking at the size of the demand, sources say the deal could have been priced another five cents higher at HK$5, but the company chose to stick with the lower level in order to include one more institution in the book. The institution, which was unwilling to pay HK$5, was not named but was obviously among the buyers who were believed to want the stock for the long term and thus should provide support in the secondary market.

At the final price, the institutional tranche was close to three times covered by about 70 accounts of which the majority were long-only funds. About 55% of the demand came from Asia-based accounts, while the US accounted for 25% and Europe for 20%, one source says. The retail tranche was said to have been 4.6 times subscribed. By comparison, the retail tranche of fashion accessory and jewellery designer Artini ChinaÆs $80 million IPO, which priced last Thursday was only about 50% covered. And womenÆs apparel manufacturer E-Land Fashion ChinaÆs retail tranche was less than 40% covered, although that deal was pulled as the issuer was unwilling to set the price at the bottom and there wasnÆt enough demand to push it any higher. At the bottom of the range, E-Land could have raised $242 million. Artini was brought to market by Cazenove, while E-LandÆs offering was arranged by Citi, Goldman Sachs and UBS.

Asia Cement (China), which is a spin-off of the Chinese operations owned by Taiwan-listed Asia Cement Corporation and part of TaiwanÆs Far Eastern Group, sold 25% of its enlarged share capital in the form of 375 million new shares. ABN AMRO and BNP Paribas were joint bookrunners.

The general need for cement to feed ChinaÆs infrastructure developments set a positive backdrop for the deal and while Asia Cement (China) is a lot smaller than the other Chinese cement producers that are listed in Hong Kong, investors liked its positioning in the market. Above all, its clinker and cement production facilities are located in the provinces of Jiangxi and Hubei in the central Yangtze River region and in Sichuan in the western part of the country, where the demand growth for cement and fixed-asset investments are above the national average. The companyÆs knowledgeable management was also viewed as a valuable asset that helped increase the confidence among the potential buyers that the listing candidate will be able to carry out its aggressive expansion plan.

The company is planning to increase its annual clinker capacity to 12.5 million tonnes by 2010 from 5.5 million tonnes at the end of last year, representing a compound annual growth rate of about 30%. Together with an expected improvement in cement prices in the provinces where it operates, this should result in a net profit CAGR of close to 37% in 2007-2010, according to syndicate research report.

Asia Cement (China) also came to market at a discount of up to 36% versus its larger comparables, which added some relative attraction. At the IPO price it is valued at 15.4 times this yearÆs projected earnings, compared with 24 times for sector leader Anhui Conch Cement and about 22 times for China National Building Materials. While Asia Cement (China) sports a faster earnings growth rate than Anhui Conch, the latter has a market cap about 10 times the size of the newcomer and thus there was no question that a substantial discount was warranted. CNBM is about 4.5 times larger and has also been growing quickly since its IPO in March 2006. A lot of that growth has come through acquisitions, though.

The cement sector in China remains competitive and while Asia Cement is generally expected to be a beneficiary from ongoing consolidation, which is driven partly by a government-induced closure to small cement plants with outdated production techniques, there are no guarantees that it wonÆt be outbid for contracts by smaller players fighting for their existence. This reportedly kept some investors away, but an even tougher wall for the company to overcome, according to one source, was the fact that most of the Hong Kong IPOs this year have fallen on their trading debuts.

ôBecause they expect the deals to go down on the first day, some investors will wait to buy until then,ö the source says. ôThe urgency of getting in on the IPO is no longer there.ö

This is the opposite situation from last year when almost all deals traded up and institutional investors who failed to get their desired allocation in the IPO typically had to chase the price higher in order to add to their holdings. This year it has paid off to wait, or to put in a small order during the IPO and then increase the exposure once the stock starts trading.

Department store operator Maoye International Holdings fell a combined 3.2% on its first two days of trading on Monday and Tuesday last week. It then jumped 5% on Wednesday and another 2.5% on Thursday before easing back to end the week at HK$3.16 û 1.9% above the IPO price of HK$3.10. And while the recovery was encouraging, it didnÆt change the fact that investors were able to pick up shares in the market at a ôdiscountö on the first two trading days.

Some of the other newcomers have taken a lot longer to move above their offer prices. One example is Want Want China Holdings, a producer of rice crackers, flavoured milk and soft candy, which raised $1.04 billion from its IPO in the first quarter. The stock fell 2.7% on its March 26 debut and another 12.3% on the second day. It then took it until April 24 to close above the HK$3 listing price for the first time. Momentum has been quite strong since then, however, and FridayÆs close at HK$3.32 û representing a 10.7% gain from the IPO price - was its highest finish yet.

Honghua Group, which is the second largest manufacturer of on-shore drill rigs, began trading on March 7 and has yet to move above its IPO price of HK$3.83, although it is getting closer to it. Having traded as low as HK$2.05 at one point, it closed at HK$3.60 on Friday which is 6% below the issue price.

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