PanAsialum kicks off IPO of up to $174 million

The supplier of iPad casings is expected to grow strongly in the next few years on the back of continuing demand for tablets.

PanAsialum Holdings, a Chinese manufacturer of aluminium products, yesterday kicked off the institutional roadshow for a Hong Kong initial public offering of between HK$1.04 billion and HK$1.35 billion ($134 million to $174 million).

The company, which has previously been referred to as PanAsia, has three business lines but in the past two years it has been putting increasing focus on the production of aluminium casings for Apple’s iPads. In 2012 this fast-growing business — electronic parts — made up 46.9% of its revenues, compared to just 8.8% in 2010. And analysts believe it will continue to grow strongly in the next couple of years with one syndicate report projecting that it will account for as much as 60% of the company’s overall revenues in the fiscal year to September 2014.

PanAsialum doesn’t sell the casings to Apple directly, but rather acts as a supplier to Foxconn, which is the largest contract manufacturer of tablets, smartphones and laptops for Apple. In fact, Apple isn’t named in either the preliminary prospectus published on the Hong Kong stock exchange website or in the syndicate research reports. It is referred to only as a “leading global consumer electronics designer.”

PanAsialum has had a business relationship with Foxconn since 2000 when it started to supply it with heat sinks, a component that is used to cool computers and other electronic devises by dissipating heat into the surrounding air. In 2011 it signed a five-year contract to supply the Taiwan-backed company with aluminium casings and it is currently Foxconn’s only supplier of this item.

The other two business lines are branded aluminium door and window systems and other construction and industrial products, mainly components and materials used for exterior and interior architectural decoration and furnishings. These two businesses accounted for 10.6% and 42.5% of the revenues in the latest fiscal year.

PanAsialum is offering 25% of its enlarged share capital in the form of 300 million new shares. The deal also comes with a 15% greenshoe that is made up entirely of existing shares and could increase the total proceeds to as much as $200 million.

As usual, 10% of the deal is earmarked for Hong Kong retail investors, while the remaining 90% will be targeted at institutional investors. The retail portion may be increased to as much as 50% via a clawback in case of strong demand.

The shares are offered at a price between HK$3.46 and HK$4.50, which translates into approximately eight to 10.5 times the company’s projected earnings in the fiscal year to September 2013, based on forecasts by the joint global coordinators.

Given its mixed business model there are no direct comparables, but according to a syndicate research report other manufacturers of light metal casings, such as Catcher, Foxconn, and Ju Teng, trade at an average 2013 price-to-earnings multiple of about nine. Suppliers of more general aluminium products, including Hong Kong-listed China Zhongwang and a number of Shanghai-listed names, trade at an average 2013 multiple of just over 12 times.

The deal has no cornerstone investors, but the banks had lined up a number of anchor investors before launch and sources said the IPO was essentially covered after the first day yesterday. In fact, during the weekend ABC International and UBS were added as joint bookrunners, while Bocom International, CICC and Platinum Securities were given the role of joint lead managers after they all brought valuable orders to the deal.

The transaction is led by HSBC and J.P. Morgan, which have been working on the IPO for more than two years and have the title of joint global coordinators as well as joint bookrunners.

The order books will remain open until January 28 and the price is expected to be fixed the following morning, Hong Kong time. The trading debut is scheduled for February 5.

The deal comes at a time when sentiment for Hong Kong IPOs is showing clear signs of improvement. Companies that listed in December have for the most part performed well – insurance company PICC, which was the largest Hong Kong IPO in 2012, has risen 34.7% since its debut on December 7 – and property developer Golden Wheel Tiandi, which is the only Hong Kong listing of size so far this year (it raised $98 million) is currently up 17.8%.

Chinalco Mining, a greenfield mining company with a copper project in Peru, is currently in the market with an IPO of up to $435 million that is due to price on Thursday morning Hong Kong time. Some $240 million of the deal will be taken up by cornerstone investors, but sources say the rest of the transaction is also coming together well and includes orders from international institutions – a rarity in many Hong Kong IPOs last year.

The syndicate research report forecasts that iPads will continue to dominated the market for tablets in the next two to three years with a year-on-year growth rate of more than 20% and a market share of more than 50%.

While this arguably puts PanAsialum in a good position, there is always a risk that Apple may choose to use materials other than aluminium for its products as it comes out with new and updated models. However, one source notes that the heat generated by a tablet is currently too high for certain materials, such as polycarbon – a mixture of carbon and plastic, which Apple is using for its new iPhones. So, even though it may be lighter and cheaper, polycarbon is unlikely to replace aluminium as the key casing material for iPads in the near-term.

A second point worth considering for investors is the fact that PanAsialum’s current contract with Foxconn runs out in 2016. And even if it is likely to be able to renew it, the terms may be different.

The current negative sentiment surrounding Apple is less likely to deter potential investors as it is mainly related to concerns about declining sales and production of iPhones. Sales of iPads remain robust and have so far not been subject to the same concerns. However, if Apple’s fourth quarter earnings report tomorrow gives even a hint of slowing growth that could quickly change.

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