Lumena set to price IPO at HK$2 per share

At that price, which is expected to be confirmed today, the thenardite producer will raise $149 million, making it the second largest Hong Kong IPO this year.

Chinese chemicals company Lumena Resources will become the fourth company of size to list in Hong Kong this year and sources say it seems intent on creating a backdrop supportive enough to allow for a better aftermarket performance than the previous three.

According to sources, Lumena will fix the price of its initial public offering at HK$2 per share, which is well below the mid-point of its indicated range of HK$1.72 to HK$2.56. One source said there was some sensitivity around this level, but added that the total order amount could have supported a higher price -- should the company have chosen to go for that.

Instead, the Sichuan-based company, which is the world's second largest producer of thenardite, is hoping that a slightly lower price will allow its shares to trade up when they debut on June 16. Over the past few weeks, two of the previous three market newcomers -- China Zhongwang Holdings and Real Gold Mining -- have edged above their IPO prices and are now trading well into positive territory, but it took quite a while for them to do so. Both stocks fell below the listing price immediately after coming to market and the third newcomer -- Chinese liquor distributor Silver Base Group -- is still lingering 10.7% below its IPO price.

Real Gold and Silver Base both priced their offerings at the top of their respective ranges, while Zhongwang set the price towards the low end.

At a final price of HK$2 per share, Lumena will raise HK$1.15 billion ($149 million), making it the second largest Hong Kong IPO this year after Zhongwang's $1.26 billion offering. It could be pushed off that rung in the near future, however, with two more listing candidates currently in the market trying to raise up to $200 million and $250 million respectively. Lumena's final price is expected to be confirmed today.

At HK$2 per share, the company will be valued at 6.1 times this year's earnings, based on the average forecast among the three bookrunners, and at 3.7 times the earnings projection for 2010. With no direct comparables to benchmark the stock against, most potential investors were said to have looked at the stock on a stand-alone basis. In that context, it is noteworthy that the expected IPO price comes at a 37% discount versus the 2009 price-to-earnings multiple of 9.7 that one syndicate research report used to calculate Lumena's fair value. According to the authors of the report, that multiple is in line with the average among other companies in the global chemicals sector. A separate syndicate research report puts fair value in a range of 6 to 11 times this year's earnings.

The deal is jointly arranged by BOC International, Credit Suisse and Macquarie.

Given the industry Lumena is in, which is likely to have been unfamiliar to most investors before launch, and the fact that it is a small-cap stock, the deal was never expected to attract massive amounts of orders. However, sources said the institutional tranche, which accounts for 90% of the deal, was more than five times covered and attracted more than 100 investors. Most of the buyers were funds focused on China, but the deal also attracted quite a few small-cap specialists. The smaller retail tranche was between five and six times subscribed.

Lumena offered 577.2 million shares, of which 70% were new. The remaining 30% were sold by chairman Suolang Duoji, who will see his current 71% stake drop to about 40% after the listing. The base size accounts for approximately 29% of the company. There is also a 15% overallotment option that could increase the total deal size to as much as $171 million.

A Credit Suisse-led consortium will hold 5.1% of the enlarged share capital before any potential exercise of the overallotment option after converting a set of warrants in connection with the IPO. The warrants were received when the consortium extended a $100 million loan to Lumena in June 2007. The loan will be paid off in full, using about 55% of the net proceeds.

Thenardite is a solid form of sodium sulphate and an important raw material for the production of powder detergents, dyes, textiles, glass, kraft pulp and pharmaceutical products.

Investors liked Lumena because of its high margins and strong earnings growth. Since the management took it over in 2004, it has seen a 10-fold increase in net earnings and has been transformed from a state-owned enterprise into a fast-expanding niche player in its sector. It has a domestic market share of 23%, which translates into 11% of the global market, and is expected to grow its net profit by 19% this year to just above Rmb500 million ($73 million), without taking into account a potential capacity increase in the fourth quarter. In 2010, earnings are expected to improve by close to 80%.

Lumena expects to complete the construction of a 200,000 tonne per year production facility for medical thenardite by the end of this year and a 1 million tonne per year mining and production facility for specialty and powder thenardite in the same area in the third quarter 2010. This will add to its current annual production capacity of 1.6 million tonnes.

Among the earlier market newcomers, aluminium extrusion products manufacturer Zhongwang closed at HK$8.64 yesterday, up 23.4% from its HK$7 IPO price. Real Gold Mining has gained 23.2% from an IPO price of HK$6.25 to yesterday's close of HK$7.70. Since Lumena launched its marketing roadshow on June 1, Hong Kong's Hang Seng Index has added close to 34%, providing a further incentive for investors to consider buying into a discounted newcomer.

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