Liansu opts for attractive valuation as it seeks HK listing

The manufacturer of plastic pipes aims to raise up to $337 million to expand its production capacity amid continuing volatility in global equity markets.

Expansion is evidently a high priority for many Chinese companies, particularly those hoping to grow along with the country's continuing industrialisation. This week, there are three industrial players in the Hong Kong market looking for capital to fund their development plans, despite the volatility in global markets that is increasing the necessity for "attractive" offering prices.

China Liansu Group, a manufacturer of plastic pipes for water supply and drainage, has joined the listing hopefuls and is looking to raise HK$2.62 billion ($337 million) to build new factories and expand existing production facilities. The company started bookbuilding on Monday and is opening its Hong Kong retail offering today.

Also in the market is touchpad maker World Wide Touch Technology, which is seeking $189 million to purchase production equipment; and wind turbine maker Xinjiang Goldwind Science & Technology, which is taking orders from retail and institutional investors this week for a Hong Kong initial public offering of up to $1.2 billion. The proceeds will be used to settle the costs of new projects and sources say Goldwind's institutional offering is fully covered.   

"Chinese companies are generally cash rich; they come to the market mainly for capital to fund their expansion," a senior investment banker said. "At the moment, IPOs and capital replenishments by Chinese lenders are the theme of the market, but there will be more groups looking for capital to fund expansion or M&A coming to the market once the banks complete their deals," he added.

Guangdong-based Liansu is offering 750 million shares, all primary, at between HK$2.60 and HK$3.50 apiece. The price range translates into a price-to-earnings (P/E) ratio of six to eight times based on 2010 projected earnings, which is "lower than the industry average of 10 to 12 times", a banker involved in the deal said. "The company understands that the market is not as good as it expected so it is willing to make the price more reasonable," he explained.

The offering accounts for 25% of Liansu's enlarged share capital. Some 90% of the offering is targeted at institutional investors, while the remaining 10% is set aside for retail investors. The deal could increase to 28% of the company if a 15% greenshoe option is fully exercised, allowing Liansu to issue an additional 112.5 million shares and raise up to $388 million.

"The Hong Kong books have already been covered by a well-mixed group of investors, including hedge funds and high-net-worth individuals," one source said. There's no cornerstone investor participating in the sale.

The international and retail offerings will both close on June 14 and the IPO price will be fixed later the same day. The trading debut is scheduled for June 23. J.P. Morgan and UBS are joint global coordinators and joint bookrunners of the deal.

Liansu currently has 11 production facilities located across China making plastic pipes and pipe fittings, which it then sells to customers via 29 sales offices and more than 600 independent distributors. It is capable of producing plastic pipes with over 7,000 different specifications and dimensions ranging from 16 millimetres to 3 metres in diameter, the company said in a preliminary IPO prospectus.

Some 25% of the company's pipes go to property developers and that has triggered some concern among investors who are worried that the authorities' tightening measures might lead to a property market crash. Investors are also questioning whether the company's profit margin is sustainable; it currently has a net margin of 14% and a gross margin of 25%, which matches the average level among its competitors, sources said.

The company said in the preliminary prospectus that expanding production is critical to its sustainable growth. It plans to expand existing production facilities and construct new ones in various regions in China in order to maintain its leading industry position. The intention is to increase its annual production capacity to 330,000 tonnes in 2012 from 245,000 tonnes in 2010.

Costs for the expansion will be Rmb3.25 billion ($475 million), with new factory buildings accounting for Rmb1.32 billion and the buying of production machines and equipment for Rmb1.09 billion. Some Rmb837 million is expected to be used to purchase land use rights, it said.

The company made a $94.5 million net profit in 2009.

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