Joint bookrunners JPMorgan and Merrill Lynch began pre-marketing a $200 million to $300 million IPO for Jinxi Iron & Steel on Monday. Formal roadshows are scheduled to kick off on February 5, with pricing set for either February 19 or 20. Co-leads are Citic and Cazenove.
Jinxi has a miniscule 1.7% market share in China's fragmented steel sector, but its flotation stands out because it is the first former State Owned Enterprise to successfully MBO and seek an overseas listing. Following its privatization and transformation into a sino-foreign JV in 2001, management came to own about 48% of the stock. The IPO will represent about 25% of the company's issued share capital.
Steel specialists say Jinxi has been a consistent market leader in Hebei province where many of China's steel producers are located. Rich in iron ore, the province is located north of Beijing and become a magnet for the country's burgeoning private sector, which now accounts for over 35% of the province's steel production.
Analysts say Jinxi has very short lead-time in the construction and break-even rate of new mills and has been able to achieve a number of efficiencies. Primarily these are reflected in high gross margins around the 26% level. Syndicate research forecasts a 23% to 28% band over the coming few years.
As a result, Jinxi is hoping to price in line with much larger comparables in the sector such Angang New Steel. Its deal is being pre-marketed on a P/E range of about 5.5 to 7.5 times 2004 earnings and an EV/EBITDA range of five to seven times.
Angang is currently trading around eight times 2004 P/E and 4.5 times EV/EBITDA. The stock spiked to a high of 14 times late last autumn after its share price soared from a low of HK$1.11 to a high of HK$4.50 over the course of the year. However, analysts have generally been revising their earnings estimates upwards on the back of a more positive outlook for steel prices in 2004.
Fears that prices would crater after China reversed its import tariffs ahead of WTO appear to have subsided. Instead, analysts now believe tight supply of iron ore will keep prices stable at least throughout 2004.
China produced over 200 million tonnes of steel during 2003 and the China Iron & Steel Association forecasts the figure will rise to 330 million tonnes by 2010. Jinxi has seen volume grow by a CAGR of 56% from 2000 to 2003, with production hitting two million tonnes by the end of last year. By the end of 2004, it forecasts production will hit 3.1 million tonnes.
While Angang primarily specializes in flat steel products used in the automobile industry, Jinxi's main focus is long steel products such as H-beams used in the construction industry. Its IPO will, therefore, be partly viewed as a play on growth around the capital city.
Because of its MBO status, the company is highly geared, with equity representing 15% of total assets and debt the remaining 85%. However a debt to equity ratio of five times will fall to three as a result of the IPO.
A small equity base also means that ROE is high with Jinxi reporting a 34% ratio in 2003 compared to 14.2% for Angang and 10.9% average for the listed Chinese steel sector.
Its operating efficiencies also mean that ROCE is high, with analysts forecasting a 27% to 32% range for 2004 compared to about 18 times for Angang.
