However, the companyÆs position as ChinaÆs largest designer and builder of ports and its current plans to move into railway construction should ensure plenty of interest in the stock, according to market watchers. The deal is being arranged by BOC International, Merrill Lynch and UBS.
ôInfrastructure is the flavour of the day. Everybody wants to own a piece of it. And like the banks, this company is a direct play on the growth in the Chinese economy,ö notes one observer.
Based on the companyÆs dominance in the Mainland û it constructs about 90% of all ports in China û and the rapid pace by which the Chinese economy continues to expand, sources say it is fairly easy to argue that CCCC should trade at a premium to similar companies in other parts of the world. According to one observer, the investment into ports in China is expected to double by 2010 and should continue to support CCCCÆs earnings.
However, given the large size of the deal and a desire to see the state-owned enterprise trade well in the aftermarket, the valuation has been kept at a ôreasonableö level, people close to the offering say.
The company is offering 3.5 billion new H-shares, or 24.5% of the company, at a price between HK$3.40 and HK$4.60 apiece, which equals a 2007 PE multiple of about 13.5 to 18 times based on consensus estimates.
The company, which is also involved in other types of infrastructure like roads and bridges, has no direct comparables in Asia, and even internationally one has to look at a combination of construction companies, designers and heavy machinery manufacturers to capture the breadth of what CCCC does. Construction contractors like SwedenÆs Skanska, GermanyÆs Hochtif and Bilfinger Berger and Balfour Beatty of the UK all tend to trade in a range of 15 to 18 times forward earnings, while heavy machinery providers such as Caterpillar and Mitsubishi trade at PE multiples in the low teens.
With the ports business accounting for about 80% of revenues and 60-70% of net profits, CCCC is more similar to a construction company, however. Its exposure to the heavy machinery sector comes in the form of its controlling stake in A- and B-share listed Shanghai Zhenhua Port Machinery, which has about 70% of the global market for port machinery. The companyÆs A-shares currently trade at 17 times earnings after its share price has more than tripled over the past 12 months.
CCCC has obtained a waiver that will allow it to trim the retail portion of the offering to 5% from the usual 10%, although this could increase to a maximum 20% in case of strong demand. There is a greenshoe that could boost the total number of shares on offer by 15%.
Another $80 million worth of shares, or about 3.9% of the total offering, has been reserved for three corporate investors. The small size of their combined investment means it is unlikely to carry the deal, but the quality of the investors is nevertheless expected to instill confidence among other investors. According to sources, the reserved shares will go to: Chow Tai Fook, which is the private investment vehicle of New World Development Chairman Cheng Yu-tung; The Government of Singapore Investment Corporation (GIC); and China Life Insurance.
Over the past three years, CCCCÆs revenues have grown by an average 31% per year and it has achieved a CAGR of 124% in net profit over the same period. In the first half of 2006 revenues grew by 39%, while net profit expanded by about 60%.
Analysts project a slight slowdown going forward, but say the company should be able to sustain an annual profit growth rate of about 20-25%. The growth will be helped by the fact that the company is able to pass on increases in raw material prices above 5%.
ôIf any company in China can control its prices, this is the one,ö says one source familiar with the listing candidate, adding that the company has been able to maintain fairly steady profit margins even with the increases in commodity prices in recent years.
One fund manager says he expects CCCC as well as the flurry of other Mainland companies currently trying to tap the Hong Kong IPO market, including Zhaojin Mining Industries, Kingboard Laminates, China Communications Services and Jinjiang International Hotels Development, to do just fine given the abundance of liquidity currently available.
ôThe sizes of most of these arenÆt that big so all of them should be able to do well,ö he says.
The final price of CCCCÆs IPO is expected to be determined on December 8 and the trading debut is scheduled for December 15. The three-and-a-half day public offering in Hong Kong will open on Friday (December 1).
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