CNBM becomes third major HK IPO to price at top end

Building materials producer sees full clawback after heavy retail demand.
China National Building Materials has raised HK$1.80 billion ($232 million) from its IPO after strong investor interest allowed it to fix the price at the top end of the range.

Some investors were attracted to the offering because of the projected growth in the mainland construction industry, which the company is in a good position to tap into given its diverse range of building materials, including cement, while others focused simply on CNBMÆs cheaper valuation compared with Hong Kong listed Anhui Conch-Cement.

A stabilization of the H-share market in Hong Kong, which was under pressure due to widespread profit taking at the beginning of the insitutional roadshow, also helped, market watchers said.

Either way, the Morgan Stanley-led deal drew about 300 institutional investors who ordered about 38 times the amount of shares available to them post-clawback. The clawback, which increased the retail tranche to 50% of the deal from 10%, came after the Hong Kong public once again flocked to an IPO in the hope of making quick share price gains once the stocks start trading.

All three major deals this year û Nine Dragons Paper, Golden Eagle and now CNBM û have priced at the top end and have had a full clawback. CNBMÆs retail tranche was 534 times covered and tied up HK$75.8 billion in cash, which compared with Golden EagleÆs HK$45.3 billion and Nine DragonsÆ HK$176.8 billion.

State-owned CNBM, offered 654 million H shares, in a price range between HK$2.30 and HK$2.75, which was increased three days into the institutional road show from an initial range of HK$2.00 to HK$2.60.

The final price values the company at 13.3 times its projected 2006 earnings, which compares with about 22 times for larger cement producer Anhui Conch. Taipei-listed Taiwan Cement - whose China operations are similar in size to CNBM - trades at a 2005 P/E of about 13 and a 2006 P/E of 11.2.

Most investors agree Anhui should trade at a premium due to its greater scale, although the current 65% valuation gap may be a bit much, they say.

This is especially true since CNBM is a more diversified company, which aside from cement also include lightweight building materials such as gypsum boards, acoustic ceiling panels and lightweight metal frames; glass-fibre and fiberglass-reinforced plastic products; and engineering services for the construction of float-glass and cement production lines.

ôThe earnings of gypsum board and the other lightweight building materials are growing at 15-20% per year and these industries are largely consolidated so you are not going to see a lot of decline in terms of product pricing,ö one observer notes. ôSo people are pretty bullish, in particularly about this part of the business.ö

CNBM is expected to post a 67% to 78% rise in net profit to between Rmb322 million and Rmb345 million in 2005, and this year should see the bottom line grow further to Rmb426 million, according to syndicate research.

Still, the share price is likely to be weighed down somewhat by its holding company structure. Among its many non-wholly owned subsidiaries, there are a couple that are even listed in its own right in ChinaÆs A-share market.

Of the total offer, 90.1% were new shares and the remainder existing shares that were sold to meet the obligations to the National Social Security Fund. At the base size the company sold 33% of its issued share capital, but there is also a 15% greenshoe that could increase the total funds raised to HK$2.07 billion ($266 million).

The shares are scheduled to start trading on March 23.

¬ Haymarket Media Limited. All rights reserved.
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