Lee and Man prices IPO

Lee & Man follows Weiqiao''s success with another well received IPO from Hong Kong.

A HK$781.9 million ($100 million) IPO for Lee & Man Paper Manufacturing has been completed by bookrunner CLSA. The 187.5 million share deal was priced at HK$4.17 per share, towards the top end of its HK$3.33 to HK$4.50 indicative range.

There is also a 28.12 million share greenshoe, although the percentage of issued share capital will not change even if it is exercised in full, as chairman Patrick Lee has an option to top the family's majority ownership back to 75% again. The public float will be 25%. Alongside the leads, co-leads were Cazenove and BOCI, with Citic and DBS as co-managers.

At an issue price of HK$4.17 per share, the company has been valued at 12.5 times 2004 earnings. This represents a slight discount to comparable mid-cap industrial stocks with a China bias.

Specialists say that while there are no direct comparables, some investors were looking at Weiqiao Textile, which priced on Friday and has a similar growth profile and market share to Lee & Man. The cotton textile producer priced its IPO at 13.6 times forward earnings.

The main difference between the two lies in their distribution patterns.Weiqiao appealed to a much larger Asian audience, while Lee & Man had a more international flavour.

Institutional books are said to have closed 7.5 times covered and retail books 16 times covered, triggering clawbacks that will lift the domestic public offering from 10% to 30%. A total of 100 accounts were allocated with a geographical split, which saw 44% placed in Europe, 29% in the US and 27% in Asia.

"We found that international investors are really buying the China growth story again," says one observer. "Hong Kong based investors are also still keen for the right stock, but there's been a noticeable rotation over the last few weeks back into local heavyweights like Cheung Kong and Sun Hung Kai."

Lee & Man is said to be China's second largest manufacturer of paper for cardboard boxes. The company currently has a 3% market share, but believes this will expand to 4% by the end of next year and 7% the year after that.

Analysts believe industry fragmentation should benefit the company as there is plenty of upside from consolidation. As a big player it is also able to maintain high gross margins around the 25% level and net margins around the 18.5% level. About 75% of its production goes for export related activities.

As one observer explains, "Lee & Man produces 650,000 metric tonnes of paper per year, whereas virtually every other paper manufacturer is a small-scale operation producing about 5,000 tonnes.

"Some investors asked why international companies have not moved in to take advantage of the high margins available," he continues. "Those foreign entities, which have set up in China, tend to focus on writing paper rather than paper for boxes. But the main reason derives from the high level of regulation. It takes two years to get all the regulatory approvals in place, then another 18 months to take delivery of the machinery and a further six months to install it."

Bankers say this makes capacity expansion very transparent. And syndicate analysts estimate that supply shortfalls will increase, since China is a net importer of paper and domestic demand is growing 10% a year.

Lee & Man plans to use proceeds from the offering to drive its expansion plan and will double capacity over the next year. The company currently services the Pearl River Delta, but its new focus will be the Yangtze River Delta.

It has a dividend policy to pay-out 40% of net income, but this will be reduced over the next year or so while its new mills are being built.

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