Much of the volatility was due to renewed concerns about the depth of the subprime loan problem in the US. And while some investors believe these problems will have little direct impact on Asia, they still expect a risk premium to compensate for recent market moves. The buy-side clearly has more bargaining power now.
Meanwhile, the appetite for lower-rated issues is diminished, as reflected when Kia Motors pulled its Baa3/BBB-rated transaction.
In this environment, China Glass guidance looks, according to some investors, somewhat unattractive. They point to Indonesia's Central Proteinaprima (CPP) similarly rated 5-year $250 million offering which recently priced at 11%. They also say CPP is involved in the buoyant shrimp-farming sector, while China Glass operates in the saturated Chinese glass industry and it is a relatively small company.
ôCPP offers more value in a better sector, so why should we invest in China Glass?," asks one buy-side source. "Also, can Standard Chartered (the sole manager on the deal) support these bonds? The bank's trading infrastructure is not as strong in Asia as some of the other banks. The last big deal Standard Chartered managed hasn't traded above par since it was issued in late May," he says, referring to the $350 million 5-year sukuk FRN for Emirates international bank.
China Glass also has a high level of debt, with its gearing ratio currently standing at 29.7%, according to the offering circular. While this ratio has reduced from a level of 38% in December 2004, it is still high. Net current liabilities also stand at Rmb1.01 billion, compared with Rmb2.1 million in 2004. The companyÆs debt-to-Ebitda ratio is 7.43%, according to a Standard and PoorÆs report.
Further, the companyÆs ratio of adjusted total debt-to-capital was 46% in 2006. However Standard and PoorÆs expects this to decline to 25%-40% over the medium term, because of improved profitability and internal cash flow generation.
Indeed, the company has shown a sound management strategy, which included the acquisition of a number of companies across a broad geography, allowing China Glass to minimise transportation and logistics costs. Its production bases are close to domestic customers and seaports, providing easy access to the export market.
The acquisitions have also allowed the company to increase the number of production lines it operates from five to 14. As a result, Standard and PoorÆs expects China GlassÆ Ebitda to increase to between Rmb400 million and Rmb730 million within the next five years. Its Ebitda currently stands at Rmb46 million.
China Glass has also diversified into higher-margin products, including low-emission glass, designed to prevent indoor heat build-up, and solar control online-coating glass (both these products have pricing advantages over clear and tinted flat glass). According to analysts, there are only two ways to get hold of low-emission glass in China û either via imports or through China Glass. Additionally, the Chinese government is reportedly looking to implement construction regulations, whereby buildings exceeding a certain height would be obligated to utilise this type of product. This bodes well for the company.
Moreover, China Glass benefits from having reputable shareholders including: Chinese equity firm Hony International which owns 33.8%; Pilkington, a subsidiary of Nippon Flat Glass (28.9%); and IFC (8.1%). Hony is associated with Legend, which owns many companies including PC maker Lenovo. Pilkington, meanwhile, is a technological leader in the glass industry.
China Glass paper will also allow bond investors to broaden their portfolios since much of the issuance in China has come from the property sector. ôMy bet is a greater amount of issuance will come from the property sector than from the non-property sector. These bonds give investors exposure to something different,ö says a source close to the deal.
According to sources, the book for the high-yield bond has already reached $100 million in orders.
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