Chaoda re-launches bond

Chinese mid-cap launches roadshows for debut bond offering.

Chaoda Modern Agriculture launches roadshows today (January 24) for a $200 million five-year issue. This marks the company's second attempt to access the international debt markets, having failed to complete a similar $200 million five-year in June 2004 via its house bank Credit Suisse First Boston.

Since then there have been a number of changes. Firstly Chaoda has added two new bookrunners - Deutsche Bank and Merrill Lynch, which has been upgraded from joint lead.

Secondly, the deal now has a 144a registration and a full package of standard US high yield covenants. These include limitations on indebtedness, restrictions on dividend payments and restrictions on asset sales and related party transactions.

Thirdly and most importantly market conditions are now far more receptive to Asian high yield offerings and Chaoda has a number of pricing benchmarks. The company has a Ba3/BB rating with stable outlook from both agencies.

In terms of rating, its closest direct comparable is Asia Aluminum, which has the same Ba3/BB rating and a slightly longer 2011 bond outstanding. This was trading around 8% on Friday.

In terms of sector, the closest comparable is probably Universal Robina Corporation (URC) of the Philippines, which priced a $125 million five-year deal just over a week ago to yield 8.25%. At the time it was rated Ba3/BB, but Standard & Poor's has since downgraded the country to BB-.

The third comparable cited by some bankers is Hong Kong's City Telecom, which has a lower Ba3/BB- rating in line with URC. The group's $125 million five-year deal is currently trading just below 8.5% compared to 8.75% at launch just over two weeks ago.

Chaoda is China's largest integrated fruit and vegetable producer with an emphasis on organic produce and is one of the world's lowest cost producers. However, the fragmented nature of China's agricultural sector means it represents less than 1% of the market as a whole.

In FY June 2004, it recorded revenue of $230 million up 25% year-on-year and EBITDA of $125 million. Post bond issue the company will run a debt to EBITDA ratio of less than two times. As of June 2004, it was also in a net cash position of $114 million.

Chaoda has said that it intends to maintain earnings of growth of 20% over the next two financial years and continues to re-iterate the company's ability to maintain exceptionally high margins in the face of its doubters. The group's gross margins have fallen slightly from 67% to 65%, but the company says this is because it has been expanding its branded supermarket chains across China.

The mainstay of its margins are fruit and vegetables production, which contributes over 90% of its revenues on margins of over 70%. The company has long argued that investors often fail to understand its business model, which relies heavily on leasing lend from lots of smallholders rather than owning it outright.

One of its key earnings drivers is land acquisition and the company has said it intends to spend about $100 million a year acquiring new plots. It does so in remote inland areas where land costs are lower and should remain that way as increasing numbers of people leave for the cities.

In total the company sold 712,000 tonnes of agricultural producer in FY04 and had a production base of 10,430 hectares throughout 12 provinces.

In its ratings release, Moody's cited the company's sound business model, experienced management, supportive government policy and favourable industry trends.

But it also highlighted the company's small scale and previous corporate governance issues. In June 2003, for example, PricewaterhouseCoopers resigned as a joint auditor. The agency notes the presence of, "material related party transactions."

Since PWC's departure the company has initiated an active IR programme and is now considered one of the most dynamic mid-cap equity plays in Hong Kong. Analysts say the bond issue will pose an interesting test of how far the company has been able to dispel any lingering concerns in the minds of investors.

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