Largest Singapore IPO by a Chinese company

Yangzijiang Shipbuilding raises $622 million as strong demand allows it to fix the price at the top of the indicated range.
Yangzijiang Shipbuilding last Thursday priced its initial public offering at the top end of the range, confirming its ranking as the largest ever IPO by a Chinese company in Singapore.

At S$943.4 million ($622 million) it is also the largest IPO of any nationality in the city state since Thai BeverageÆs $983 million IPO in May last year.

According to sources, the UBS-led deal attracted strong demand from international investors who recognised the fact that the Chinese shipbuilding industry is on the rise with Mainland companies grabbing market share from their South Korean rivals. And since this is only the second Chinese shipbuilder to list offshore û and the first private sector one û there was also some scarcity value at play.

The deal was said to have been covered already on the first day. Ultimately, about 400 investors came into the book, submitting orders for more than 48 times the shares available to them û not counting the portion set aside for cornerstone investors. The four cornerstones bought a combined $120 million worth of shares, or about 19.3% of the total deal size, and agreed not to sell their shares for three months.

The four were: GZ Trust Corporation, a discretionary trust set up for Chinese Estates director Joseph Lau and certain members of his family; Lee Kian Soo, the executive chairman and founder of Singapore-listed Ezra Holdings, an integrated offshore support solutions provider for the oil and gas industry; Lyndhurst Gain, which is a part of the Malaysia-based Kuok Group; and Vervain Equity Investment Limited, which is directly owned by Chen Wai Wai Vivien.

The rest of the order book was made up of investors that would normally buy into a Hong Kong IPO for a Mainland company, although with perhaps some extra demand from Singapore-based institutions. Private-banking-type demand from both Hong Kong and Singapore was also strong, sources say.

Concern among some analysts that the shipping cycle is past its peak and that there may be an oversupply of ships once all the vessels currently under construction are put in the water over then next two to three years, didnÆt appear to have spilled over to investors û even though such a scenario might lead to a slowdown in the future order flow.

The price was fixed at the top of the S$0.70 to S$0.95 price range, which values the shipbuilder at 15.3 times its projected 2008 earnings. This represents a significant premium to the Korean shipbuilders, which are currently trading at an average of eight to nine times. Because of their lower overheads and labour costs, Chinese shipbuilders as a group are generally seen to deserve a premium, however.

The final price puts Yangzijiang at a significant discount Guangzhou Shipyard International, which is the only other Mainland shipbuilder listed in the international market. Guangzhou Shipyard, which trades both in Hong Kong and Shanghai is valued at a 2008 earnings multiple of about 22 times in Hong Kong.

Sources say this discount was regarded as attractive since Yangzijiang is a leaner operation with better margins and lower costs that its state-controlled rival. Given its private ownership, it is also set up with more incentives for the management, including share options.

However, thatÆs not to say Guangzhou Shipbuilding doesnÆt deserve its higher premium. The company doubled its profit last year amid strong demand for new ships and, according to industry watchers, there is also speculation that its SOE parent will inject more assets into the listing vehicle û in which case it would be worth more in terms of growth.

Yangzijiang offered 993 million shares, or 30% of its issued share capital, of which 98% went to institutional investors and only 2% to Singapore retail investors. DBS is a joint lead manager for the global offer and also the lead manager for the domestic portion of the sale.

Two thirds of the shares are new, while the remaining third will be sold by executive chairman Ren Yuanlin, who is also the founder of the group. There is a 15% greenshoe, which could boost the total proceeds to $715 million.

The Jiangsu-based company is benefiting from a strong order flow, which is believed to be partly due to a global trend of outsourcing manufacturing to companies in (China), as well as the increasing demand by Chinese carriers for domestically built vessels. The Chinese government is also actively promoting the domestic shipbuilding industry by providing loans with preferential interest rates.

At the end of last year, the company had a visible order backlog of approximately $2.8 billion for vessels that are due to be delivered between 2007 and 2010. And since then, it has received new orders with an aggregate value of $229 million for four container ships and four mini bulk carriers, which it expects to deliver in 2009 and 2010.

In 2006, the companyÆs net profit rose 60% to Rmb454.3 million ($58.2 million) on the back of a 52% rise in revenues to Rmb2.32 billion ($298 million).

A key part of the its growth strategy is to build ships of increasingly larger sizes, including containerships with load carrying capacities of 6,000 twenty-foot equivalent units (TEU) and above, Panamax and Aframax chemical tankers and bulk carriers of 100,000 deadweights tonnes (DWT) and above, which it feels will support greater profit margins.

The company will also expand into the manufacturing of offshore vessels and oil tankers as it believes there will be a pickup in demand for these due to the increased investment by major players in the offshore oil and gas industry.

Prior to the Yangzijiang, the largest Singapore IPO by a Chinese company, as recorded by Dealogic, was property developer YanlordÆs $165 million offering in June last year, followed by CapitaRetail China TrustÆs $161 million deal in November.

Yangzijiang is scheduled to start trading in April 18.
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