Chinese aluminium foil leader markets IPO

The roadshow for Xiashun's $300 million Hong Kong IPO is set for the end of the month.
China-based light-gauge aluminium foil producer Xiashun Holdings has started pre-marketing of its Hong Kong initial public offering to investors. The company plans to raise up to $300 million and has scheduled its roadshow for November 27.

Xiashun is the largest light-gauge aluminium foil manufacturer in China controlling about 40% of the market by volume. Light-gauge aluminium foil is mainly used in sterile packaging, tobacco and other flexible packaging, to preserve the taste and aroma of products and provide a longer shelf life.

Xiashun is planning to offer 500 million new shares, or approximately 25% of the company, with 90% earmarked for institutions and the rest for retail investors. The deal carries the normal Hong Kong IPO structure with a 15% greenshoe and a clawback mechanism, so if the retail tranche is more than one hundred times subscribed, the retail portion will increase to 50% of the deal. JPMorgan and UBS are acting as joint bookrunners.

According to CRU Strategies, a consulting firm specialising in metals and mining, the global aluminium foil industry is highly concentrated with the top 10 suppliers accounting for 54% of production in 2006. Meanwhile, Sunlight Metal, a Chinese light metals consulting firm, says that the top five producers in China control 77% of the domestic market.

Xiashun has a strong operating record and is expected to increase its net profit at a compound annual growth rate of 34% for the next two years. The companyÆs earnings grew by 10% between 2005 and 2006, after a 43% leap between 2004 and 2005.

ôIt is a play on the consumption growth story in China,ö says a source. ôLook at other packaging material manufacturers like Nine Dragon Paper and Lee & Man Paper Manufacturing. People buy consumption products with boxes produced by them. As a packaging material producer, Xiashun grows in the same way as these guys.ö

There arenÆt any direct comparables for Xiashun because most of its local and overseas counterparts are privately-held, though the source says that packaging companies tend to trade at an average multiple of 21.5 times 2008 earnings. He says the growth seen by beverage companies like China Mengniu Dairy and China Huiyuan Juice Group also offer a hint as to XiashunÆs future prospects because consumable companies like these are affected by the same earnings drivers.

Another growth driver will be the companyÆs ability to expand overseas. It is already the only qualified Asian supplier to Tetra Pak, a leader in the global food processing and packaging industry with 129.7 billion packages delivered in 2006. Tetra Pak is currently the single largest client of Xiashun, accounting for around 39% of its sales in 2006.
Xiashun has established long-standing relationships with its key customers. A source close to the business says the company is capable of passing on the rising raw material costs to its customers, as it is selling its products on a cost-plus basis.

About 60% of the proceeds from the IPO are also to be spent on expanding upstream, including building a rolling mill to produce its own aluminium sheets from aluminium ingot, according to a source. The company currently buys its aluminium sheets from a Korean company. It recently hired a professional from this company to help it with its upstream strategy. While these plans are being implemented, Xiashun remains heavily dependent on Novelis, a global aluminium rolling company, which is its largest supplier, accounting for 84% of its cost of sales in 2006.

Another 30% of the proceeds will go towards potential acquisitions, setting up joint ventures and upgrading existing manufacturing facilities.

Xiashun is a family-run business, with 70% of the company currently owned by its chairman Chen Chengxiu and the rest by his wife.

The bookrunners are no doubt hoping that the Hong Kong market stabilises by the time Xiashun is ready to list. The Hang Seng Index has been riding a rollercoaster since the beginning of this month, shedding more than 4,500 points in two weeks. The market recovered more than 1,300 points, or 4.9% yesterday, to close at 29,166.

Surprisingly, the volatility hasnÆt deterred potential listing candidates who are still queuing up for Hong Kong IPOs. Part of the reason for this bravery may be the unprecedented success of Chinese online trading company, which almost tripled from its issue price on the first day of trading. However, the looming year-end "deadline" likely also plays in. For most companies, missing this cut-off means having to wait until their 2007 earnings are out and audited before they can revive their listing plans.

JPMorgan and UBS are also working side-by-side with ABN AMRO Rothschild and BOC International on China Railway GroupÆs upcoming A- and H-share listing, which aims to raise up to $2.5 billion in the H-share market alone. JPMorgan is also mandated with Credit Suisse on Anton OilfieldÆs $200 million Hong Kong IPO. Meanwhile, Dongyue Group, a Chinese refrigerant manufacturer, will also launch the roadshow for its $220 million IPO next week. That deal is being run by Citi.
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