Centron Telecom aims for $108 million IPO

The provider of wireless coverage solutions hopes to lure investors with hefty 2G demand and the upcoming launch of 3G in China.
Centron Telecom, one of the top three wireless coverage solution providers in China in terms of revenue, kicks off the roadshow today for its initial public offering which aims to raise up to HK$844.9 million ($108 million).

Wireless coverage solutions refers to solutions that help extend the reach of wireless networks to areas with weak or no coverage, such as high-rise buildings, highways, railways and tunnels. The company also helps to ensure that mobile phones work in remote regions and in complicated topographical areas like mountains, coastlines and grasslands.

Centron is offering 238 million shares, or 34% of its enlarged share capital, at a price ranging from HK$2.96 to HK$3.55. Of the total shares offered, 26% are existing shares, which will be sold by early investors into the firm. A 15% greenshoe could boost the deal size to as much as $124 million.

The price range values the company at 10 to 12 times its estimated earnings for 2007. This pitches it at a discount to Hong-Kong listed Comba Telecom Systems Holdings and US-listed China Grentech, which both operate in the same industry in China and are regarded as its closest comparables. Comba currently trades at an estimated 2007 price-to-earnings multiple of 15, while Grentech is quoted at 21 times.

These comps have seen very different market performances in the past few months, however. Recently finding support at the $10 level, GrentechÆs price has plummeted roughly 45% since January this year, while Comba has climbed more than 20% during the same period to a close of HK$3.90 yesterday.

According to observers, Comba and Grentech have higher revenues than Centron, but the latter has an edge over its competitors with regard to working capital management. With better payment terms in less competitive inland regions, the listing candidate has a short accounts receivable period of less than 65 days, compared with 185 and 376 days for Comba and Grentech respectively. This is a real issue in China where the telecom carriers are infamous for their long payment cycles.

Centron also has a low cost structure as it operates at cheaper locations.

Telecommunication-related businesses have always been hot in such a robust emerging market as China. According to CCID, an information technology research authority in China, the countryÆs wireless coverage market will grow at a compound annual growth rate of 12.1% over the next five years, compared with a 4.7% CAGR from 2004 to 2006. The institute relates the rapid growth to a persistent increase in 2G demand and the upcoming 3G launch.

The companyÆs 2G revenues in China more than doubled to Rmb553 million ($71 million) in 2006 from a year earlier. A syndicate research report projects that revenues from this business will increase by 29% and 4% in 2007 and 2008 respectively, while its 3G business will start generating income of Rmb208 million in 2008.

ô3G opportunities in China should be the key selling point of the deal,ö says an analyst covering the industry.

While China has started 3G trials in 10 cities, the market generally expects that the official 3G licensing wonÆt happen until 2008. Demands for wireless coverage equipment should then escalate as these devices comprise an essential part of 3G network planning.

CentronÆs net profit increased by 55% to Rmb58 million in 2005, and by another 132% to Rmb134 million in 2006. The syndicate report projects total revenues will grow by 50% to Rmb201 million in 2007 and by 17% to Rmb235 million in 2008.

Because of its considerably higher mix of new mobile subscribers from inland regions, Centron is expected to benefit from higher-than-average 2G demand. In addition, the company is seeking to expand into large coastal cities in the Mainland and to overseas markets in Australia, Southeast Asia and Africa, which will provide new sources of income.

The report estimates that the company will be able to capture a 13.5% share of the 2G market in 2007 and 16% in 2008, mainly due to ongoing industry consolidation.

The number of players in the wireless coverage industry has declined from over 200 to approximately 60 in the past two years, while the top six players have increased their combined market share to 57.2% in 2006 from 45.5% in 2004.

ôMarket consolidation in the industry will continue over the next few years, which will be beneficial to Centron,ö the report argues.

Most of the companyÆs coverage solutions are supplied to ChinaÆs two leading wireless operators, namely China Mobile and China Unicom. In 2006 its sales to China Mobile and China Unicom accounted for 51.2% and 38.4% respectively. It is estimated that the company had a 10.4% share of the Mainland 2G market in 2006.

As any other players in the industry, however, Centron is vulnerable to changes in the mobile operatorsÆ capex spending as well as to a further delay of ChinaÆs 3G launch.
Compared with larger players such as Comba and Grentech, Centron does not have complete 3G products. Limited exposure in large coastal cities and its relatively late entry into the 3G market will also limit its 3G opportunities at the beginning.

Fierce competition is also putting pressure of the companyÆs margins with its gross margins narrowing to 37% in 2006 from 44% in 2004. The research report forecasts that the companyÆs gross profit margin will continue to fall in the coming two years.

Dai Guoliang, the chief executive officer and founder of the company, controls roughly 32% of the company before the IPO. While there will be no cornerstone investors in the deal, private equity firm Cathay Capital currently own 30% of the company and its founder, Selwyn D. Sussman, holds another 9% through investment firm Molatis. Another two individual investors have a total 8.6% share of the company.

CentronÆs share offering has the usual structure with 90% going to the institutional tranche and 10% earmarked for retail investors. There is also a clawback mechanism that could increase the retail tranche to as much as 50% in case of heavy oversubscriptions. JPMorgan is the sole bookrunner.

The company will use the proceeds to increase its production capacity through construction of the second phase of its production facility in Xunmei. Some of it will also go towards the purchase of manufacturing and testing equipment, long-term research and development, expansion of domestic sales and marketing as well as staff training.

The final price is expected to be determined on June 26 and the Hong Kong trading debut is scheduled for July 5.
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