Fuyao Glass sets price range for HK listing

The Chinese auto glass manufacturer is set to offer a chunky discount to its A shares thanks to a widening valuation gap between the Hong Kong and Chinese stock markets.
Fuyao founder, Cao Dewang
Fuyao founder, Cao Dewang

Fuyao Glass begins bookbuilding this Wednesday for a HK$6.5 billion to HK$7.39 billion ($839 million to $951 million) dual listing that is on target to beat Hong Kong Broadband Network's recent $750 million deal as the territory's largest initial public offering so far this year.

Fund managers say the 440 million primary share deal will be marketed at HK$14.80 to HK$16.80 per share. Based on Monday's closing price of Rmb15.02, that represents a 9% to 20% discount to the auto glass manufacturer's Shanghai-listed A shares.

Pricing is scheduled for March 24 and the listing is expected on March 31. 

Fuyao Glass is likely to be the first of a number of forthcoming Hong Kong IPOs to breach previous guidelines from the China Securities Regulatory Commission, which mandated a maximum 10% discount to a company's A shares.

As FinanceAsia reported on Monday, fund managers believe GF Securities's impending Hong Kong listing will need to come at a discount of up to 60% to its A shares to make it attractive relative to other Chinese brokers already listed in the Territory. 

The CSRC is having to relax its stance because of a valuation gap that has opened up between the two markets. The trend started last summer and although there were signs of a reversal at the beginning of this year, it proved to be a short-lived phenomenon. 

Last June the Hang Seng China AH Premium Index traded at around 92, near the bottom end of a range that had spanned 90 to 115 since the end of 2011. But in the last six months of 2014, the index rose to just over 130 before retreating back to 122 at the end of February. By Monday's close, it was back up at 129.22 again, implying an average A share premium of 23.98% relative to H shares.

Nearly every dual-listed stock is trading at a premium in China with the exception of just four - China Vanke, Jiangsu Expressway, Anhui Conch and Huaneng Power.

This divergence is also reflected in the respective trading performances of the Hong Kong and Chinese stock markets, with the latter driven by strong retail participation.

Since the beginning of the year, the Hang Seng China Enterprises Index has traded down 1.5%, falling 3.3% since early March. In contrast, the Shenzhen and Shanghai 300 Index has risen by 4.8% since the beginning of the year and by 11.8% since early February. 

Fuyao Glass's valuation

At HK$14.80 to HK$16.80 per share, Fuyao Glass is being pitched at 11 to 12.5 times 2015 earnings, based on the forecasts of joint sponsor UBS. The Swiss bank currently values Fuyao Glass at 13.69 times 2015 earnings after accounting for the base deal's 18% dilution.

The consensus analyst valuation currently stands at 12.68 times expected 2015 earnings, without accounting for the dilution.

However, the planned equity raise will increase Fuyao Glass's issued shares to 2.442 billion from 2.002 billion and reduce consensus earnings per share from 1.197 to 0.97. Based on this one metric alone, Fuyao Glass's consensus valuation will expand to 15.48 times.

But investors will also need to decide whether this infusion of cash will have a positive impact on the company's 2015 earnings, which could push its EPS back up again. UBS believes it will help net profits grow to Rmb2.687 billion ($429 million) in 2015, a 22% jump from the Rmb2.2 billion Fuyao Glass reported for 2014. 

The consensus view prior to the expected capital infusion had been for a more modest 8% jump in earnings to Rmb2.387 billion ($381 million) in 2015.

Cornerstones anchor order book

Fuyao Glass has long been one of the 20 most actively held stocks under China's Qualified Foreign Institutional Investor programme and strong demand is expected for the Hong Kong listing, with $340 million already locked in from cornerstone investors across China and the US. 

This demand accounts for over one third of the institutional order book, which will in turn comprise 90% of the overall deal. Retail investors will be entitled to between 10% and 30%, subject to oversubscription levels.

There is also a 15% greenshoe, which could bump the total deal size up to 20.2% of the company's enlarged share capital. 

One of China's most respected private sector companies

Fuyao Glass's domestic share price has had a very strong run and continues to outperform the underlying market. Year-to-date it has risen 23.7%, including a 3.8% gain since the beginning of last week when it became clear the deal was about to launch. 

That strong share price performance is partly due to the company's overseas ambitions and partly thanks to the Chinese government's decision to reduce natural gas prices, one of its main cost inputs.

Indeed, the main reason why Fuyao Glass has chosen to list in Hong Kong now is because its international expansion plans are moving up a gear. The company is about to open its first overseas plants in Russia and the US in a bid to become the world's largest auto glass manufacturer, overtaking Japan's Asahi Glass.

In a recent research report, Credit Suisse estimates that the US plant will contribute 18% of Fuyao Glass's earnings in 2016 after a very quick ramp up to an 80% utilisation rate.

Fuyao Glass currently ranks as the world's second-largest auto glass manufacturer by sales with a 20% market share compared to Asahi's 22%. However, most of Fuyao Glass's market share comes from China where it has a 63% hold over the market. 

Excluding China, Fuyao Glass has an 8% market share compared with Asahi's 25%. 

Investors who believe Fuyao Glass has what it takes to become the world's number one are therefore likely to believe that the stock still has plenty of upside and can trade through the Japanese giant, which is currently valued at 24 times forecast 2015 earnings, based on Bloomberg consensus figures. 

Fuyao Glass's 'going global' ambitions are nothing new by Chinese standards. Where it does differ is in its philanthropic bent.

Chairman Cao Dewang is one of the country's most noted charitable donors and in 2011 Fuyao Glass became the first Chinese company to set up a charitable trust funded by its listed shares. The Heren Foundation now owns 14.48% of Fuyao Glass. 

This reputation for contributing to society may give added comfort to international investors who remain ever vigilant of being tripped up by unfamiliar Chinese companies, which subsequently turn out to have been taking financial shortcuts.

Fuyao Glass's IPO is being sponsored by China Merchants Securities and UBS. Joint bookrunners are Goldman Sachs and HSBC.

¬ Haymarket Media Limited. All rights reserved.
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