Qingdao Port kicks off roadshow

The port operator becomes the latest company to attempt a Hong Kong flotation in difficult markets.

Qingdao Port International began formal roadshows Monday and aims to raise up to $377 million in a Hong Kong initial public offering next month, the latest company to test the city’s uncertain IPO market.

The state-owned port operator plans to sell 776.4 million new shares at HK$3.76 each, with BOC International, Citic Securities International and UBS leading the deal. The listing is scheduled for June 6, according to a term sheet.

It is the second attempt at a Hong Kong listing after pork producer WH Group yanked its much awaited offering one month ago.

Of the shares on offer, 90% will be primary, with a 15% overallotment option. Existing shareholders and cornerstone investors will be subject to a six-month lockup.

The company has identified six cornerstone investors – including marine transportation company Shanghai Zhenhua Port Machinery, China International Marine Containers and truck manufacturer Sinotruk International Investment – who have pledged to invest a combined HK$1.3 billion ($167.7 million).

Most of the proceeds will go towards a planned capacity expansion at the Dongjiakou Port Area, which upon completion will have 112 berths and a forecasted annual capacity of 300 tonnes of cargo.

Comps
Hong Kong-listed port operators have an adjusted 2014 p/e average of 10.1 times, according to one syndicate report, which argues that QPI could be valued at 10.6 times 2014 forward earnings, a 5% premium to its peers, given its operational efficiency and diverse cargo mix. This would put the company's valuation at Rmb16.2 billion ($2.6 billion).

But port operators are not a hot sector right now. One banker close to the QPI deal described demand as lukewarm so far, largely a result of poor aftermarket performance by its peers.

Qinhuangdao Port — a coal-focused port operator — secured $562 million last December after pricing its shares at HK$5.25 each. Shares fell 17% in the first few days of trading and are down 21.5% since listing, based on Monday’s closing price. It is trading at 9.1 times its forward earnings.

Qinhuangdao’s focus on coal might explain poor performance. Investors are concerned about the port’s future profitability, particularly now that the Chinese government has made restructuring its economy and cutting back on coal consumption a priority.

Dalian Port, which raised $856 million in November 2010, is down 48% since it floated its shares, and is down 4% year-to-date. It is currently trading at 8.4 times its forward earnings.

Xiamen International Port is up 1.75% this year to May 26 and is trading at a forward p/e of 8.5 times.

Company executives and bankers will no doubt highlight QPI’s year-on-year earnings when meeting with potential investors. It reported a net profit of Rmb1.5 billion in 2013, compared with Rmb1.2 billion in 2012. Revenue meanwhile totalled Rmb6.5 billion last year, up from Rmb5.7 billion the year before.

One syndicate research report forecasts net profits will total Rmb1.52 billion in 2014, Rmb1.7 billion in 2015 and Rmb1.9 billion in 2016, representing an annual growth rate of 11.5% during the three-year period.

QPI tries to differentiate itself from its peers in a number of ways. A natural deep-water port, QPI-operated berths have water depths of 5.5 to 25 metres and can therefore accommodate most of the world’s largest vessels. This is an important factor as the industry is shifting more towards bulkier vessels.

The port also does not suffer from freezing and silting, so its operations are less sensitive to weather conditions, unlike some of its peers, and it is well-linked to railways, highways, waterways and pipelines that connect it to northern and northwestern China.

QPI’s wide range of cargos is another differentiator. It handles metal ores, coal, petroleum, grains, steel, cars, and other liquid bulk and dry bulk — a diverse mix that should in theory buffer against cyclical downturns.

Analysts say the development of the new Dongjiakou Port Area will be a major earnings driver for QPI, noting that the Shandong provincial government has also submitted a proposal to establish a free-trade zone in the Qianwan Port Area, which is controlled by QPI.

Weak sentiment
Still, the timing for QPI’s roadshow is not ideal. Demand for IPOs in Hong Kong has soured after WH Group, which would have been the city’s biggest IPO in three years, pulled its deal. This negative sentiment could affect Qingdao Port and Tianhe Chemicals, which aims to start a roadshow by next week at the latest and raise up to $1 billion.

The pork producer sought to raise as much as $1.9 billion, but weak demand and the company’s refusal to lower its indicative price range put the deal on ice.

Although train manufacturer CNR China was able to raise $1.3 billion on May 17, making it the first listing in Hong Kong since WH, its shares priced at the bottom end of the range amid weak sentiment. Shares fell 2% during the first day of trading, but have recovered and are now up 0.77%.

It remains to be seen whether tepid demand is specific to WH Group or if it represents a larger issue with IPO appetite in general, one analyst told FinanceAsia. "Institutional investor demand is the key to executing these deals," he said.

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