Paper recycler hopes to collect $183 million from IPO

Fook Woo Group is one of six small-cap listing hopefuls to kick-off a Hong Kong IPO in the past week.

While several highly anticipated large initial public offerings have yet to materialise, Hong Kong is generating a lot of noise at the moment with several listing hopefuls announcing offerings in the past week, leading to a fight for investor attention.

The six listing candidates are all private companies from the manufacturing and retail sectors. Analysts say companies with a niche market or with opportunities to benefit from Beijing's economic blueprint are likely to attract more orders, as investors are still cautious about potential monetary tightening measures.

Hoping to prosper from China's environmental-protection policies, Fook Woo Group, a recycled paper company, is looking to raise up to HK$1.43 billion ($183 million). This would make it one of the bigger deals in the batch, second only to sofa maker Man Wah's HK$3.4 billion share sale, which began bookbuilding last Thursday.

Hong Kong-based Fook Woo, which collects thousands of tonnes of waste paper in the city on a bi-weekly basis and then ships it to factories in mainland China, hopes to use the IPO proceeds to fund its expansion and increase the market penetration of its tissue products.

Fook Woo is offering 620 million shares, including 500 million primary shares and 120 million secondary shares. The company could reap as much as $212 million by offering an additional 93 million new shares, if a 15% greenshoe option is fully exercised.

The offering price ranges from HK$1.68 to HK$2.30 per share, which represents a price-to-earnings ratio of 9.1 times to 12.5 times based on projected earnings for 2010.

Hong Kong-listed paper manufacturers Nine Dragons and Lee & Man, which collect used paper from recyclers, are currently trading at 20 times and 55 times this year's earnings respectively. The two companies are market leaders in terms of cardboard output in China and both consume large quantities of waste paper.

Packaging demand in China fell substantially when the global recession cut export orders, and Nine Dragons was on the verge of bankruptcy in late 2008 as it struggled to repay a Rmb500 million ($73 million) loan. Lee & Man's profits were also squeezed by the weakened demand for carton-boxes at that time.

Nine Dragons' share price is down nearly 10% so far this year and Lee & Man has fallen 13%, which compares with a 3.8% drop in the benchmark Hang Seng Index.

Fook Woo operates four waste-paper collection stations in Hong Kong and also collects used paper at its Huizhou production base in Guangdong province. It has a total maximum daily capacity of 2,436 tonnes, the company said in its IPO prospectus. Sales of recovered paper and tissue paper products contribute 54% and 42% respectively to the company's revenues, it said.

The company generated $142 million of revenues last year and $22 million in net profit. The net profit was 28% lower than in the previous year.

Fook Woo has earmarked 90% of the offering for international investors and the remaining 10% for a Hong Kong retail tranche. Royal Bank of Scotland and UBS are arranging the deal and began taking institutional orders on Monday. The final price will be fixed on March 24 and the trading debut is scheduled for March 31.

Some observers argue that the market conditions are still difficult for newcomers -- even when they approach investors with a cheap valuation relative to the comps.

"The recent new IPOs are likely to receive a lukewarm market response. People are not that enthusiastic about new equities anymore, there are too many uncertainties in the market," said Ben Kwong, head of research at KGI Asia.

Castor Pang, research director at Cinda International, attributed the current mini IPO rush to the listing application requirements of the Hong Kong regulators.

"Companies submitting listing applications before the end of March need only include results for the first three quarters of the previous year (in their listing documentation). If they miss the March deadline they will have to include full-year or even first-quarter results," he said. "We tend to see more new share offerings before the end of March, June and December every year," he added.

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