Dalian Port floats $279 million IPO

Exposure to China oil imports attracts four strategic investors, which will buy 1/3 of offer.
ChinaÆs growing demand for oil will be a key selling argument for Dalian Port as it aims to raise up to HK$2.16 billion ($279 million) in an initial public offering ahead of a listing on Hong KongÆs main board.

Dalian Port, which also operates container terminals and other value added ports services, is the main port for oil imports in Northeast China and is located close to one of four sites chosen to store ChinaÆs strategic oil reserves. This makes it well placed to benefit as crude consumption picks up, analysts say.

The state-owned enterprise, which is brought to market by BNP Paribas Peregrine and UBS, kicked off its official roadshow yesterday with an offer to sell 840 million H shares, or about 30% of the company, at HK$2.175 to HK$2.575 each. There is a 15% greenshoe, that could boost total proceeds to $320 million.

The deal has the usual Hong Kong split with 10% of the shares earmarked for retail investors and the rest for institutions. The latter portion will be reduced to 60%, however, as bankers familiar with the offering say one third of the deal has been set aside for strategic investors.

According to these sources, the company will sell shares to four strategic investors, comprising JapanÆs largest shipping line Nippon Yusen K.K., China Shipping Container Lines, Hutchison Whampoa and Singapore ports operator PSA International. They will have a combined 10% stake in the company at the time of listing.

While this sale will likely help boost investor confidence in the offering, it will also mean that if retail subscriptions are strong enough to trigger a maximum clawback û that is, more than 100 times the retail shares on offer û institutional investors will get no more than 20% of the total deal.

And given the upbeat after-market performance for recent Hong Kong IPOs, strong demand from retail investors is virtually guaranteed, brokers say.

ôEverybody thinks they can make easy money on the IPOs and this company also has a niche because it is the only port with exposure to oil,ö argued a director at a local brokerage.

Of the most recent listings, Hunan Nonferrous Metals has rallied 95% since its trading debut on March 31 and Advanced Semiconductor Manufacturing Corp rose 32.8% on its first trading day last Friday before edging back 5.9% yesterday.

The price range values Dalian Port at 15.1 to 17.9 times its 2005 earnings. This, the syndicate argues, pitches the company at a discount of up to 18% versus recently listed, and similarly sized, container terminal operator Xiamen International Port, which they estimate trades at a 2005 P/E of about 21-22 times.

Bloomberg data, which comprise three analyst estimates, gives a slightly lower 2005 PE ratio of 19.4 times for Xiamen, however. The stock has rallied 45% since its trading debut in December.

Including China Merchants International Holdings and Cosco Pacific, Dalian PortÆs Hong Kong listed comparables trade at an average 2005 PE multiple of about 19.5 times, while mainland-listed container port operators trade and an average trailing PE of 15.5 times.

Looking at it in isolation, Dalian PortÆs container operations would warrant a discount since the throughput of 2.7 million twenty-foot equivalent units (TEU) was the lowest among ChinaÆs top eight container ports last year. Xiamen was the seventh largest with 3.34 million TEU, while Dalian PortÆs closest rivals in geographical terms û Qingdao and Tianjin - handled 6.31 million TEU and 4.8 million TEU respectively.

However, it is the companyÆs oil terminals, with a total handling capacity of 56.5 million tons and storage facilities of 2.6 million cubic metres that sets Dalian Port apart, investors say. All other listed ports companies in Hong Kong/China operate container terminals and its two main oil handling rivals - Qingdao and Ningbo - are both unlisted.

ôOil handling is mainly about imports, which makes it a better story than container ports that depend primarily on exports of goods to the US and Europe and consequently on the demand in those markets,ö one observer said.

The oil trade, on the other hand, is underpinned by ChinaÆs hunger for energy and fuel as the economy continues to expand at 8-9% per year.

According to UBS forecasts, ChinaÆs oil imports will increase by about 80% to 225 million tons in 2010 from 127 million tons last year to help cater for a 38% increase in demand to 421 million tons.

The oil business is also more profitable.

According to syndicate research, Dalian PortÆs oil terminal business achieved an average operating margin of 53.1% and an operating profit CAGR of 11.4% in 2003-2005. Thanks to its higher margins, this business accounted for 45.9% of operating profit last year, despite generating only 38.4% of the companyÆs Rmb1.27 billion in total revenues.

By comparison, container terminal services accounted for 45.3% of the revenue, but only 41.7% of the profit. The remainder was made up of value added services such as tugging, piloting, port tallying and IT services.

Net profit increased 3.7% in 2004 and by 14.1% to Rmb420 million ($52.5 million) in 2005.

Located at the entrance of Bohai Bay, the companyÆs oil terminals are supported by a comprehensive last-mile transportation network of pipelines and railways, which connects the port with key refineries in the Northeast of the country and gives the company an edge over its competitors, one observer said.

The company also has a strong relationship with its two key customers PetroChina Dalian Petrochemical and Dalian West Pacific Petrochemical (WEPEC), which accounted for 78% of its oil terminal revenue in 2005.

Dalian Port will use about $87 million of the IPO proceeds for the construction of crude oil storage tanks, which will help increase its handling capacity. About $51 million will go towards funding of four new container berths, $35 million for new tug boats and about $55 million to repay loans.

The company currently has a high net gearing ratio of 154.8% as the addition of new capacity in recent years has been financed mainly through bank loans.

Syndicate analysts forecast modest growth of 12-15% in container throughput in 2006-2008 at Dalian Port as well as at ChinaÆs other coastal ports, amid expectations of a possible slowdown in export growth. The companyÆs container throughput grew at 32.1% in 2004 and 19.6% in 2005.

However, the potential for tariff increases û the company charges handling fees well below other ports in the region û in 2007 and 2008 and higher storage fees could become catalysts for further earnings growth, they argue.

Also, government efforts to ôrevitalize the Northeastö should help manufacturing in this region to move up the value chain and improve demand for container shipping. At present, this region with its state-owned heavy industries is considered a weaker catchment area in terms of container traffic than other regions further south where lighter manufacturing industries are more common.

The order book for the IPO will close on April 21 and the price is expected to be fixed on the following day. The shares are scheduled to start trading on April 28.
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