qunxing-shows-chinese-paper-makers-remain-attractive

Qunxing shows Chinese paper makers remain attractive

The decorative paper maker prices its Hong Kong IPO at the top of the range to raise $206 million.
Qunxing Paper Holdings has brought more proof that investors continue to view Chinese paper manufacturers as lucrative investments, with its Hong Kong initial public offering being significantly oversubscribed. As a result, the specialty paper manufacturer had no difficulty pricing the IPO at the top of the range for a total deal size of HK$1.6 billion ($206 million).

With its main product being decorative base paper, Qunxing stands out versus the other two Hong Kong-listed paper manufacturers which focus on more upstream production of containerboard and packaging boxes. However, Qunxing was clearly riding on the back of the success of the other two, which have seen their share prices multiply since their respective listings.

Decorative base paper is an intermediate product commonly used as the decorative layer to furnish the surface of laminated board. The finished product has a wide variety of applications within interior decoration of buildings, furniture, wooden floorboards and household wares, among other things.

Like on many other Hong Kong IPOs, the allocation of QunxingÆs offering was dominated by retail investors and cornerstones. Retail investors asked for over 910 times more shares than initially set aside for them, triggering a full clawback that increased the size of the retail tranche from 10% to 50%.

Meanwhile, three cornerstone investors had already taken up 32% of the total offering. This meant that, including the greenshoe, there was only $67 million worth of shares left for other institutional investors. According to sources, this portion ended up over 120 times covered and attracted more than 200 orders. As the offering was not open to onshore US investors, the majority of the demand came from Europe and Asia. There was a good mix of investors, including long-only funds, hedge funds and some corporates, the sources say.

In early 2006, when containerboard and linerboard manufacturer Nine Dragons Paper first offered its shares to the public through a $438 million IPO, the retail tranche alone attracted HK$176.8 billion ($23 billion) worth of local cash. Since then, its stock price has rallied almost seven times from the HK$3.40 issuance price, closing at HK$23.35 last Friday. Lee & Man Paper, which makes containerboard that it uses to produce corrugated board and carton boxes, has seen its price surge nearly eight-fold from its 2003 IPO price of HK$4.17 to a close of HK$32.65 on Friday.

Renewed optimism about the Hong Kong stockmarket is also seen as a motivation for investors to pile into IPOs, which tend to be offered at a discount to other companies in the same sector. The Hang Seng Index climbed 5% last week and wrapped up the week at a new high of 25,843 points. Chinese coking coal miner Hidili Industry International Development, which is the first listing candidate of size to complete a Hong Kong IPO after the August correction, surged 77% in its trading debut Friday, suggesting the next lot of IPOs will attract even more punters hoping for quick gains.

Qunxing fixed the price at HK$5.35 apiece, which values the company at 24.7 times its 2007 earnings. Nine Dragons, which has a fiscal year ending in June, currently trades at 46 times its fiscal 2007 earnings and 31.8 times its estimated fiscal 2008 earnings, according to Bloomberg data. Lee & Man, whose fiscal year ends in March, trades at 26.2 times its projected 2008 earnings.

Qunxing estimates that its net profit will jump 1.2 times year-on-year to reach Rmb210 million ($26.7 million) this year. Its bottom line has grown at a compound annual growth rate of 45.4% in the past three years, reaching Rmb93.9 million in 2006.

Qunxing will mainly use the proceeds to expand its production capacity and upgrade its current production lines. The company will spend Rmb163 million on its seventh production line which is currently under construction and will add another 30,000 tonnes of annual capacity to its current 170,000 tonnes when it begins commercial production in early 2008. The manufacturer will also spend Rmb720 million on an additional four production lines, which are expected to start operations during 2009 and will have an aggregate designed annual capacity of 120,000 tonnes.

The Shandong province-based company also makes printing paper that is used mainly for printing or photocopying û a business it started in July 2006. According to the prospectus, 87.7% of the companyÆs turnover last year came from decorative base paper, while the remaining 12.3% was generated by the printing paper business. At present, only one of the companyÆs six production lines is used to produce printing paper.

Qunxing offered 300 million shares, or 30% of its enlarged share capital, at a price between HK$4.10 and HK$5.35 per share. The deal has a 15% greenshoe, which will boost the final deal size to $237 million if fully exercised.

Of the total shares offered, 16.7% were existing shares sold by Boom Instant, a company jointly held by the Zhu family. Zhu Yu Guo and his son Zhu Mo Qun are founders and executive directors of the company. The Zhu family will still hold 70% of Qunxing after the IPO.

The three cornerstones, Hong Kong-listed Cheung Kong (Holdings), Chow Tai Fook (the private investment vehicle of New World Development chairman Cheng Yu-Tung) and Kerry Holdings (a member of MalaysiaÆs Kuok Group that is controlled by tycoon Robert Kuok Hock Nien), will each have a 3.2% stake in Qunxing at the time of the listing.

ICEA was the sole bookrunner of the deal. The trading debut is scheduled for October 2.
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