Joint-bookrunners BNP Paribas Peregrine and Morgan Stanley launched pre-marketing on Monday May 3 for an IPO of China Shipping Container Lines (CSCL) that should raise up to $1.5 billion. Formal roadshows were originally cheduled to begin on Monday May 17, but have been put back for at least a week while the leads gather additional pricing feedback
Alongside the leads, Credit Suisse First Boston is senior co-lead, with ABN AMRO and CLSA as co-leads. Nomura will run a separate POWL (Public Offer Without Listing) in Japan.
The company was initially pitched on a valuation spanning about nine to 13 times 2004 earnings, although there have been wide variations between different syndicate members over where fair value should lie. However, fund managers say the leads are also making heavy use of 2005 multiples because the company's high growth profile makes it look better on this basis relative to comparables, particularly in Taiwan.
The main problem the leads have is sentiment towards Greater China stocks, which remains extremely poor. On top of this, annual global freight rates are currently being re-negotiated, lending additional uncertainty to the sector's underlying fundamentals.
In a bull market, CSCL's strong growth profile would easily enable it to price at a clear premium to a sector, whose fortunes are increasingly tied to global demand for exports sourced from China. In the current market environment, however, the leads need to convince investors a valuation in line with global comps is reasonable.
Pushing the valuation too far would not only harm CSCL, but also the cluster of large China deals sitting right behind it in the IPO pipeline. Should it price towards the top end of the range, it will beat SMIC as the largest IPO from non-Japan Asia so far this year. Many believe it needs to achieve some tangible measure of success to revive the Hong Kong IPO market after SMIC's overly ambitous pricing burst the latest China bubble.
To do so, observers say the leads need to demonstrate the industry cycle has far from peaked after a spectacular run in 2003 and beyond this, that CSCL can live up to its growth forecasts.
CSCL is currently the world's tenth largest container shipping company, but its aggressive expansion plan should propel it to the number six ranking within the next three years. Based in Shanghai, it is one of two giant Chinese shipping companies and was formed in 1997 to break the monopoly of its main rival Cosco Shipping (currently unlisted).
According to container analyst BRS-Alphaliner, CSCL had a fleet of 100 ships at the end of February and was transporting 210,680 TEU's per annum. At number nine in the rankings, COSCO had 111 ships and TEU's of 238,000.
In terms of size, CSCL's main comparables in Asia would be Japanese shipping giants such as Nippon Yusen and Mitsui-OSK. As of February, the former was shipping 260,000 TEU's and the latter 181,000 TEU's.
Both companies are trading at a premium to the global sector average PE of just below 10 times 2004 earnings (editor's note: all share prices relate to May 4 when this article was first published). Nippon Yusen, for example, currently trades at about 14 times and Mitsui at 11.5 times.
In Hong Kong, there are two comparables, although specialists say neither are good proxies. China Shipping Development is a sister company of CSCL, but operates in the bulk shipping sector and its fortunes are closely tied to oil imports.
So too there is Tung Chee-Hwa's company, OOIL (Orient Overseas International), which ranks as the world's 12th largest. During 2003, the stock shot up over 500%, but specialists say its valuation is skewed by a limited freefloat, small institutional investor base and family ownership. It is currently trading at about five times 2004 earnings.
The best comparables are said to come from Taiwan: Evergreen Marine; Wan Hai Lines and Yang Ming Marine. Specialists say they are a better comparable than the Japanese because they share a similar profile in terms of shipping routes.
In 2003, CSCL derived 75.4% of revenue from long-haul routes shipping goods to the US and Europe. This was very similar to Yang Ming, which shipped 148,000 TEU's and derived 80% of revenue from long-haul routes. Evergreen, on the other hand, had a more balanced ratio and Wan Hai derived 68% from intra-Asian routes.
However, the Taiwanese shipping companies are trading on a confusingly broad range of PE ratios spanning Yan Ming on roughly 6.5 times 2004 earnings, to Wan Hai around 8.5 times and Evergreen 10.5 times.
Over the past two months, all three have been hit by a triple whammy. Chen's victory in Taiwan's Presidential election dimmed hopes for direct trade routes with China and hit valuations that appeared to have been running ahead of themselves. Lately they have been further compromised by China's efforts to cool its overheating economy.
Evergreen, for example, has come down from a year-to-date high of NT$40.2 in late February to NT$25.5 yesterday. Yan Ming, meanwhile has dropped from NT$44.5 to NT$27.8 and Wan Hai from NT$36 to NT$27.8.
Specialists say the key question for investors now is whether they have been oversold. At the beginning of 2004, most analysts were not expecting the industry cycle to turn until late 2005.
Some have also argued that share prices tend to peak about six months ahead of a peak in freight rates and will always overshoot their historic highs at this point. None of the three Taiwanese companies have yet hit their peak multiples and many houses still argue for a supply/demand imbalance in the global shipping sector, which will push freight rates higher during 2004. Global shipping consultant Drewry is forecasting rate rises of 24% for 2004.
Fund managers say syndicate research is showing a consensus view that demand for container shipping will increase 9% this year and supply of container ships by 8%. In particular it is the supply side of the equation, which leads some analysts to predict the continuation of the current cycle well into 2005.
The main driver for container shipping is changes in world trade volume. Thus while China may rein in economic growth and hence imports of commodities, exports should remain high given the broader global economic pick-up. CSCL is currently running at full capacity and believes it can maximize demand because new capacity is coming on stream ahead of most competitors.
As one specialist comments, "CSCL is a young company and was still at the build-out stage in 2001/2002 when many of its competitors were suffering from an industry downturn. It got orders for new ships in early and at a cheap point in the cycle."
According to global shipping consultants such as Drewry and Clarkson, order backlogs at shipping yards are running at an all-time high of just over two years. CSCL, on the other hand, is predicting an increase in operating capacity of 119% over the next three years. Yan Ming, by contrast, is expecting to increase capacity by just 20% over the next two years.
CSCL says that capacity will increase to 276,000 TEU's by the end of 2004 and 350,000 by the end of 2005. As a result, fund manager say the leads are forecasting net profit growth of about 140% during 2004.
At the end of 2002, CSCL reported a net loss of Rmb597 million ($72 million), moving to a net profit of Rmb1.38 billion in 2003 ($167 million) and forecast of about Rmb3.3 billion ($401 million) in 2004.
In turn analysts are expecting EPS growth of 30% to 40% in 2005 as more new capacity comes on stream. At the bottom end of the range, this will pitch the deal on a 2005 multiple of around six to seven times. Because the Taiwanese have much weaker EPS forecasts in 2005, they will continue to trade on higher multiples spanning eight to 12 times.
Specialists say CSCL is also one of the world's most cost efficient shipping lines because its fleet is young (9.7 years). This means its operating cost per TEU is cheaper than rivals. On an adjusted basis (accounting for varying freight rates across different global routes), CSCL averages $750 per TEU compared to $995 for Evergreen and a high of $1,236 for Singapore's Nepture Orient Lines.
Yet CSCL's expansion has come at the expense of high gearing. At the end of 2003, the company was reporting a net debt to equity ratio of 206% versus an industry average closer to 40%. However, proceeds from the all new share IPO are being used to reduce gearing and the company expects to run a net cash position by the end of the year.