Fuyao Glass pre-markets Hong Kong IPO

Shanghai-listed glass manufacturer hopes to take advantage of strong momentum in its share price with a dual listing in Hong Kong, which will begin pre-marketing later this week.

Shanghai-listed Fuyao Glass plans to launch pre-marketing later this week for a $700 million to $800 million listing of its shares in Hong Kong. The deal's soft launch was pushed back by a few days on Monday after a slight delay in clearing the final regulatory hurdles.

When it does come, the company hopes to take advantage of its strong domestic performance, which has seen its Shanghai-listed shares soar by 87% in the last 12 months and by around 7% so far this year.

The world's second-largest auto-glass manufacturer is proposing to issue 18% of its enlarged share capital through a 440 million primary share deal via joint sponsors China Merchants Securities and UBS. In addition, there is a 15% greenshoe, also comprised of primary shares, which will bring the deal up to 20.2% of its enlarged share capital.

This dilution will push up Fuyao's forward price-earnings ratio from its current level of 12.71 times expected earnings, based on Bloomberg consensus analyst estimates, to roughly 15.66 times post greenshoe.

This latter figure does, however, exclude any additional benefit from the IPO proceeds on earnings.

The valuation expansion means that Fuyao is now trading at a big premium to smaller domestic competitors such as Hong Kong-listed Xinyi Glass, which is bid at 9.1 times forward earnings and Shanghai-listed CSG Holdings on 8.91 times. 

However, the new valuation puts it more in line with global competitors such as France's Cie de Saint Gobain, which is trading at 15.51 times earnings.

It will also still leave it with a big discount to America's PPG Industries on 20.1 times and the world's largest manufacturer of auto-glass, Japan's Asahi Glass, which is trading at 24 times.

Domestic standard-bearer now looking oversea

Fuyao has long been considered one of China's most impressive private sector companies and much of its share price performance has been driven by its recent overseas expansion and the likely impact this will have on the company' global market share. 

It has a 20% global market share compared with Asahi's 22%. But much of this comes from China where Fuyao has a dominant 63% hold over the market. Excluding China, Fuyao has an 8% global market compared with Asahi's 25%.

Fuyao intends to change that and is in the process of preparing for the launch of its first overseas manufacturing bases in Russia and the US. 

The group's Russian operations are due to become operational in the first half of 2015. In a recent research report, Credit Suisse estimates the plant will account for 3% of revenues and 2% of earnings in the 2016 financial year. 

But analysts are far more excited about its US plans. Fuyao's Ohio plant is due to open towards the end of the year and Credit Suisse believes it could rapidly ramp up to an 80% utilisation rate since the company has already secured business from a number of US car manufacturers and could switch some of its export business there too.

The bank estimates the plant will contribute 10% of Fuyao's overall revenues in 2016 and 18% of its earnings.

The company recently reported its 2014 annual results, which came in line with expectations. Net income rose 16% year-on-year to Rmb2.2 billion ($350 million).

More of a surprise was the 68% dividend pay out ratio, which was higher than the 50% rate of recent years. Based on the current share price of Rmb14.77, this equates to a dividend yield of 5.05%.

Management guided for an 11% increase in revenues during 2015 and a 1.2% increase in operating margins. 

Margins continuing to expand

In recent years, Fuyao has been able to mitigate margin pressure from rising labour costs by increasing the amount of float glass (its key raw material) produced in-house. From 58% in 2011, production increased to 87% by the end of 2013 and the company expects the figure to top 90% by the end of 2015. 

Over the same time period, its gross margin has expanded from 36.6% in 2011 to 41.4% in 2014.

Fuyao sells glass for new cars where margins are much higher rather than in the after market in which many of its domestic competitors operate. 

Analysts believe one of the key earnings drivers this year could be a reduction in the price of natural gas, a key cost input in glass making. Glass manufacturers were one of the industries hardest hit by a series of government-instigated price hikes in 2013 and 2014.

However, the recent fall in oil prices has made gas more uncompetitive than the Chinese government ever intended and it has already begun to rectify the situation by announcing a 5% cut in the blended price for non-residential users, effective April 1.

Natural gas accounts for 16% of Fuyao's cost of goods sold and analysts believe the new cut will improve its earnings by 1.7% over the current fiscal year. Some believe further cuts could be forthcoming later this year.

Dedicated philanthropist

Fuyao was founded by one of China's most well known businessmen, Cao Dewang, who began his career making glass for water meters. In 1985, he switched gear when he saw Japanese companies starting to manufacture auto glass in China and the company was listed on the Shanghai Stock Exchange in 1993.

Cao, who is now chairman of the company, is also one of China's biggest philanthropists. He also took the unusual step of creating a charity -- the Heren Charitable Foundation -- using shares in his listed company.

Heren now owns 14.48% of Fuyao and uses its dividend income to fund educational and healthcare projects on the Chinese mainland.  

Founder Cao Dewang

Investors considering the Hong Kong IPO will now need to decide whether the company's promising international growth prospects are already priced into the current share price.

Domestically, analysts argue that it will be extremely difficult for competitors to break Fuyao's stranglehold because auto glass necessitates high safety standards that provide barriers to prospective new entrants.  

What may concern them more is the impact of slowing car sales growth in China although this is yet to deter either foreign or domestic manufacturers, which continue to expand capacity.

Goldman Sachs and HSBC will act as joint-bookers alongside the sponsors for the IPO. The deal is scheduled to formally launch on March 18, with pricing on March 24 and listing on March 31.

This article has been updated since first publication.

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