BBMG IPO attracts five cornerstone investors

BBMG Corporation yesterday started the official marketing for its upcoming initial public offering, which is looking to raise up to HK$5.95 billion ($768 million), and already it is attracting strong interest from across the investor community. The management lunch briefing in Hong Kong was packed with potential buyers and sources say the deal was covered before the day was over.

The company is the largest supplier of building materials in Beijing, Tianjin and Hebei province and it is also involved in property development and investments. If successful, it will be the second largest IPO in Hong Kong this year after aluminium extrusion company China Zhongwang Holdings, which raised $1.26 billion in late April.  

People involved in the BBMG offering say the first day enthusiasm brought flashbacks to the IPO frenzy in 2007 when investors were scrambling for a piece of every IPO in anticipation of getting rewarded with quick and sizeable gains as soon as the new stock started trading. The fact that the most recent IPOs have rallied on the first day appears to have reinforced the feeling among investors that once again, they need to be part of this. And contrary to the smaller listings seen over the past month, BBMG's offering is large enough for the stock to be quite liquid, which should make institutional investors more comfortable to invest.

BBMG is also bringing back another feature common in the days of heady IPO gains -- cornerstone investors. According to sources, the company has signed up five investors who have agreed to buy a combined $175 million worth of shares and hold on to them for at least six months. This is the first time since October that a Hong Kong IPO has been able to attract cornerstone investors, but even before that - notably in May and June last year - bookrunners had found it more and more difficult to get investors to commit to a lockup as the stockmarket was getting increasingly volatile and new listings were starting to routinely trade down on their debuts.

The initial idea with cornerstone investors is both to build momentum during the bookbuilding and to help stabilise the stock when it starts trading. However, during the bull market years in Hong Kong -- when it was questionable whether this kind of support for new listings was actually necessary -- the cornerstone process became a way for a group of tycoons and mainland companies to get priority access to popular IPOs. And when the new listings started to lose ground immediately on their debuts, their interest to provide this kind of "support" waned substantially.

Clearly though, it will take time to get back to that situation again, and for now, the cornerstones are likely to play the role that they were initially intended to and help convince other investors to buy in too. Above all, the fact that five investors have agreed to a lockup on BBMG suggests that sentiment is definitely turning more positing -- despite the recent setback in the secondary market.

According to sources, the cornerstones include: China Investment Corp, China's sovereign wealth fund, which is buying $35 million of stock; China Life Insurance and Bank of China Investment Group, which are taking $50 million each; and the Och-Ziff hedge fund and an investment company controlled by Robert Kuok of the Kerry Group, which are investing $20 million each.

The attraction of BBMG is related to the fact that the government's $585 billion stimulus package, which is largely focused on infrastructure, is expected to boost the demand for cement and other building materials over the next couple of years. This has resulted in strong gains for other sector peers such as Anhui Conch Cement, Shanshui Cement and China National Building Materials in the past few months. As a leader in its region, BBMG is also expected to benefit from the government's intention to consolidate the cement industry and close down small and inefficient cement factories. According to the company's preliminary listing prospectus, the aim is to reduce the number of cement producers to 2,000 from 5,000 by 2020.

BBMG's strong position in the industry is evident by the fact that it supplied the cement for more than 90% of the buildings constructed for last year's Beijing Olympics. Cement and other building materials accounted for about 70% of its revenues last year, compared with 23% from property development.

Meanwhile, the IPO is coming at a time when confidence is returning to the Chinese property market, which may help support a higher valuation than if the company had been a pure cement manufacturer. However, some market participants argue that the mixture of businesses warrants the equivalent of a conglomerate discount.

The company, which is being brought to market by J.P. Morgan, Macquarie and UBS, has set a price range between HK$5.18 and HK$6.38, which gives a total deal size between HK$4.83 billion and HK$5.95 billion ($623 million to $768 million). It is selling 933.3 million new shares, which represents 25% of the enlarged share capital.

The price range is equal to 11.3 to 13.9 times BBMG's 2009 earnings, based on the consensus forecast among the three bookrunners. UBS has a slightly more conservative earnings forecast than the other two, however, and based on its numbers, the 2009 earnings multiple increases to 12.2 to 15 times. At the bottom of the range, this puts it clearly at a discount to some of the other Chinese cement and building materials producers, which are viewed as comparables -- albeit less than perfect given that BBMG has a property business as well.

Industry leader Anhui Conch Cement is trading at a 2009 P/E multiple of just over 21 times, but it is much bigger than BBMG and therefore should fetch a premium, analysts say. Smaller players China National Building Materials trades at 14.5 times and China Shanshui Cement Group at 13.2 times.

One source said investors appeared to regard the valuation as reasonable, but added that the demand outlook for cement and property will also be important for making a decision on whether to invest in this IPO or not.

"If you like the property and cement themes, you would probably buy this on the valuation," he said.

The deal has the usual structure for a Hong Kong IPO with 10% earmarked for retail investors and the rest offered to institutional investors. The retail tranche, which will open for subscription on Friday, can be increased to as much as 50% if demand is strong enough to trigger a clawback. Sources say the orders so far have included a lot of chunky tickets from retail brokers, which suggests that this will be another popular IPO with retail investors.

The offer to both retail and institutional investors closes on July 22 and the pricing will be announced the following day (Hong Kong time). The shares are scheduled to start trading on July 29.

The most recent Hong Kong IPO to use a cornerstone investor was Renhe Commercial Holdings, which raised $435 million in a deal that was almost entirely shunned by international investors. However, Warburg Pincus bought $50 million worth of shares with a six-month lock-up. And China South Locomotive & Rolling Stock's $533 million IPO in August last year was supported by three cornerstones - China Life Insurance, GE Capital Equity Investors and Korea-based Mirae Asset Global Investment.