HSBC pre-markets Hainan Meilan Airport

China''s second airport operator launches an H share offering.

Pre-marketing began yesterday (Monday) for a roughly $100 million offering for Hainan Meilan Airport under the lead management of HSBC, with Citic Capital, ICEA, ING and Nomura as co-leads.

Formal roadshows are scheduled to begin next Tuesday and run for nine business days, with pricing set for Friday November 9. The company is offering 45% of its enlarged share capital via a 201.7 million share sale (ex shoe), although a strategic investor, Copenhagen Airports, has already committed to purchase a 20% stake for a maximum of $66 million, with ING acting as advisor. The remaining shares will have the usual 90%/10% split between international and retail investors.

Indicative pricing will see the deal pitched at a slim discount to Beijing Capital International Airport, China's largest airport operator, which is currently trading on a P/E multiple of 11.9 times 2002 earnings and closed yesterday (Monday) at HK$1.64 per share. 

By contrast, Hainan Meilan is China's eighth largest operator in terms of passenger throughput and is attempting to secure investors on a likely 2002 P/E multiple in the 10.5 to 11.5 range. At these levels, it will come at a 14% to 4% discount to Beijing Capital, which is currently down 10.87% on the year, compared to a 5.376% rise in the China Enterprises Index. 

As well as being smaller in scale, Hainan Meilan will have a much smaller market capitalization of around $240 million compared to Beijing Capital's $808 million. However, while the deal will be less liquid, it will offer investors a higher dividend yield and officials have said the company intends to pay out 60% of net income in 2002, equating to a dividend of yield of roughly 4.5% compared to Beijing Capital's current yield of 3.98%. 

Both companies trade at a discount to global comparables such as England's BAA, the world's largest listed airport operator, which is currently trading on a 2002 P/E multiple of 18.31 times. Analysts say the Chinese operators will continue to trade at a discount until the regulatory regime becomes much clearer. 

The country's industry regulator, CAAC, has never explained the basis on which it sets aeronautical fees, or how often it intends to increase them. For domestic carriers, the last revision to ground handling fees and aircraft movement fees took place in 1992 and for international carriers in 1995.

In selling the deal, the lead is likely to highlight that airport operators offer a low risk entry to the transportation sector and high growth earnings based on China's GDP forecasts. This is because the domestic operators are insulated both from the global downturn in the aviation industry post September 11 and the cut throat competition prevalent among domestic carriers.

Analysts say that passenger traffic has historically grown at two times GDP and Hainan Island, dubbed the Hawaii of China because it averages 300 days sunshine a year, received 11.25 visitors last year. Of this number, 10.79 million were Mainland Chinese. 

The high number of tourist passengers to business passengers should be positive for earnings because the former tend to spend more than the latter. However, this is balanced by a low number of domestic visitors to international visitors, since airports typically receive three times more from the latter than the former. 

By the end of 2002, Hainan Meilan is expected to have been granted an international license, although observers say that this will not be reflected in an earnings uptick for a few years. The airport only opened in 1999 and received just over five million passengers in 2001. However, the airport is already running close to full capacity and analysts forecast that it will have hit its full six million passenger threshold by the end of next year.

This means that it will have to enter a new round of capital expenditure, which will bring down dividend payments. However, strategic partner Copenhagen Airports says that an ability to cost efficiently manage capex is one of the key services it brings to the agreement with Hainan Meilan. 

International director Kristian Bjorneboe comments, "On the one hand, airline operators run high EBITDA margins and ours are the highest in Europe, averaging 55% to 60%. But the other side of the story is the high proportion of revenue ploughed into capex, typically 30% to 40%. What we've done is successfully expand the airport in a modular fashion. This means you don't suddenly jump from six million to 10 million passenger capacity overnight but take a series of smaller steps which are more efficient from a cost perspective but difficult to put in place." 

In 2000 and 2002, Copenhagen Airport was voted the world's best by Business Traveller magazine and Bjorneboe says the company has been at the vanguard of the industry because it was one of the first and still one of only a small number of international operators that have been privatized.

The second key element Copenhagen brings to the deal is experience expanding non-aeronautical revenues, which often constitute an operator's most lucrative source of revenue. Copenhagen derives over 50% of its revenue from non-aeronautical businesses (retail including duty-free, car parking and food provision), whereas Hainan Meilan derived 19% in 2001. 

Net income amounted to Rmb87 million ($10.52 million), a 200% increase over the previous year and is forecast to hit Rmb195 million ($23.5 million) by the end of 2002. About 46% of overall revenue (Rmb185 million) was contributed by two key clients; Hainan Airlines (27%) and China Southern (19%).

Bjornboe concludes that Copenhagen was attracted to Hainan Meilan because the company is keen to diversify its international portfolio and believes in both the China growth story and Hainan's tourism potential. Copenhagen has an international portfolio that spans Norway through Newcastle to Cancun and its strategic stake in Hainan Meilan marks the group's first but probably not last foray into China. 

In addition to gaining two out of nine board seats, the agreement between the two foresees exploring the possibility of managing other airports. Hainan Meilan already manages a second airport on the island, Sanya airport, which is much smaller and handled one million passengers in 2001.

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