Chinese IPO's back to the fore

As state-owned China Aluminium continues to roadshow across the globe, two privately-owned Chinese companies test investor demand for their prospective IPO''s.

Zhejiang Glass, which completes roadshows today (Friday) and Clear Media, which began pre-marketing on Monday, are at the forefront of a new wave of privately-owned Chinese companies hoping to access equity capital on the Stock Exchange of Hong Kong. Bankers report that a growing number of RFP's (Requests for Proposals) are being issued by similar entities on the Mainland in a signal that the government is actively pushing the private over the public sector.

As one banker puts it, "It's very clear the Chinese government wants capital to be allocated where it will be used most efficiently. Few would disagree that this means the private sector and I believe this will be one of the major themes of equity issuance from the Mainland going forwards."

Clear Media, which is hoping to raise about $100 million, began pre-marketing at the beginning of this week under the sole lead of Goldman Sachs and is currently scheduled to begin formal roadshows on Monday December 3. ING Barings will be a co-lead in the international tranche and BOCI in the Hong Kong retail IPO.

The company has a highly profitable niche in the outdoor advertising segment of the Chinese media sector and also benefits from a strategic stake by Arizona-based Clear Channel, the world's largest outdoor advertiser. Pending a successful IPO, Clear Channel will own about 46% of the company, with Compass Venture Fund - jointly held by Shanghai Industrial and AOL Time Warner - on 5%, public investors 25% and the 24% balance by a company held by founding shareholders, the Han brothers.

The company's growth prospects have been compared to that of Clear Channel, which has seen its market capitalization expand from $30 million in 1984 to a current level of $25 billion. Clear Media has a forecast Compound Annual Growth Rate (CAGR) of 30% for the next three years, based on high EBITDA margins and the growth potential of the China market.

It currently operates 12,000 advertising panels on bus shelters across 21 major China cities. In Shanghai, for example, it has an 80% market share, with future growth underlined by the fact that China has one tenth the number of bus shelters per head of population compared to developed cities such as Paris.

Typically, the company builds its own bus shelters under license from municipal authorities and then retains exclusive advertising rights for the following 10 years. Some 95% of current revenues are said to derive from this source, with EBITDA margins standing at 40%.

Investors believe that pricing will come at a reasonable discount to the current EV/EBITDA levels of Clear Channel, which is currently trading at 20 times 2002 earnings. Proceeds from the new share offering will be used to build more bus shelters and branch into point of sale advertising.

In the meantime, Zhejiang Glass is set to become the first privately-owned China incorporated company to list on the main board of the HKSE. With Nomura as lead manager, roadshows are due to wrap up in London today (Friday), with institutional allocations to be completed on Monday.

Earlier this week, the indicative price range was lifted on the back of strong demand, with company now being pitched on p/e ratio of 7.5 to 8.5 times 2001 forecast earnings (fully diluted) against 6 to 8 times previously.

The new share deal comprises 170 million shares, representing 30% of the company's enlarged share capital, with a further 25.5 million new shares on offer through the greenshoe. Core Pacific and HSBC are co-leads.

Based on a price range of HK$2.61 to HK$2.96, the company will raise HK$503.2 million ($65 million) at the top end of the range and HK$578.7 million including the greenshoe. Unusually, the Hong Kong IPO will not open until November 29 and will run until December 4, with listing scheduled for December 10.

Based on indicative levels, the company is coming at a discount to the H-share average. According to Nomura's figures, this presently stands at 7.7 times 2001 earnings and 8.6 times 2002 earnings, or 11 times 2001 earnings (minus the two oil and gas giants).

As a young company, Zhejiang is growing at a fast rate, enjoying a CAGR of 114% between 1998 and 2000. It is the Mainland's fifth largest flat glass producer, with a 4.18% market share, although as bankers point out, the top 10 Chinese glass manufacturers account for only 35% of overall production between them.

Selling points are said to be high efficiency ratios and fast growth. Zhejiang, for example is one of the fast growing provinces in China, with 11% GDP growth forecast for 2001. Zhejiang Glass is also said to run on an output per employee of five times the national average.

During 2000, it reported revenue of Rmb500 million ($60 million) and is forecasting net profit of Rmb208 million during 2001 ($25 million). Net margins currently stand at 30% and the company is hoping to boost these to 50% by using proceeds from the IPO to move into processed glass production. Currently, Zhejiang produces flat glass (used for large buildings), the raw product for processed glass.

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