Chinalco begins pre-marketing

Morgan Stanley and CICC finally set to launch one of the biggest IPO''s from China this year.

Pre-marketing for a deal that will represent 30% of the company's equity capital will begin on Monday. Subject to positive feedback, formal roadshows have been timetabled to begin in Asia on November 19, Europe November 22 and the US November 29, for pricing on December 6.

Initially the $300 million to $500 million New York and Hong Kong listed deal was expected to have an extremely small syndicate and prior to a government-imposed ban also include Credit Suisse First Boston. It has now been separated into three tranches.

In the US, there will be one co-manager Merrill Lynch and four underwriters including Salomon Smith Barney and AG Edwards. In Europe, co-leads will comprise JPMorgan and UBS Warburg, with co-managers numbering Cazenove, Daiwa and Merrill Lynch. For the Hong Kong IPO, there will be two co-leads - Bank of China International and DBS Bank and four co-managers - Hang Seng, Tai Fook, TIS Securities and ICEA Securities.

The offering is considered to be one of the toughest from China in recent years and its size has been kept flexible ahead of the completion of pre-marketing. Few also remain sure whether Chinalco (Aluminium Corp of China) has even managed to secure a strategic investor. Initially, the company had hoped to find a single buyer willing to purchase up to 60% to 70% of the offering amount. Rather than secure a number of passive investors similar to previous Chinese IPO's, the company was said to be looking for a true strategic partner.

Rumours recently began circulating that the final two aluminium companies still in discussion with Chinalco - Alcoa of the US (the world's largest producer) and Pechiney of France - had pulled out over valuation disagreements. In the last few days however, some China experts say that it seems the company may have yet succeeded.

Most analysts also conclude that since the company is highly geared to aluminium prices, a small price swing either way will have a major impact over its valuation.

Because aluminium is also highly geared to global economic trends, many argue that an upturn cannot be expected until late next year. As one New York-based analyst explains, "We have a fairly negative short to medium term view and believe that prices will not rebound until late 2002. Some investors may want to buy stocks at current low levels, but our own analysis shows that shares have never led a recovery in aluminium prices, they have always followed it."

Global comparables such as Alcoa and Canada's Alcan are currently trading on P/E multiples of 18 times 2002 earnings. On an EV/EBITDA basis, Alcoa is trading at 7.8 times 2002 earnings and Alcan at 6.2 times 2002 earnings.

Chinalco is expected to come at a steep discount to both companies and price along the lines of Hindalco, cited by analysts as the best emerging markets comparable. The Indian aluminium producer is currently trading on a p/e ratio of 5.1 times 2002 earnings and on EV/EBITDA multiple of only 2.2 times 2002 earnings.

Analysts comment that Chinalco has two main factors in its favour. Firstly, China is still a net importer of aluminium and as such is somewhat insulated from global prices. Secondly, Chinalco is also said to benefit from a cheap and abundant source of coal next to its plants. "This is a key issue as one of the main industry drivers is the efficiency with which a company can get the commodity out of the ground," says one analyst.

Chinalco is composed of the eight largest alumina manufacturers in China, as well as four research institutes and a couple of construction firms. It is currently the world's third largest alumina producer and accounts for 70% of the domestic market's alumina and 23% of its aluminium. At its inception earlier this year, the company had assets of Rmb35.6 billion ($4.3 billion).