Midas Holdings, a Chinese manufacturer of aluminium alloy, started bookbuilding yesterday for an up to HK$1.34 billion ($174 million) share sale and secondary listing in Hong Kong. The company plans to use the proceeds to expand production capacity and for potential acquisitions.
Midas, which is already listed in Singapore, started production of aluminium alloy extrusion products in 2001 in China, and had a domestic market share of 66% last year in terms of sales revenue for high-speed trains and metro-train car bodies, according to the company. It supplies the metal products to China’s leading industrial players, including China CNR Corporation and CSR Corporation, both of which are state-owned locomotive and transportation equipment manufacturers.
Midas’s sales are set to benefit from the growing demand for metro and high-speed trains. China’s ministry of railway plans to invest Rmb2 trillion from 2011 to 2015 to expand its railway system with an emphasis on the development of metro and high-speed rail lines. The country also plans to build 40,000 kilometres of new railway tracks between 2008 and 2020.
However, the same demand for more trains could also adversely affect Midas’s business and cause delivery and installation delays if it outpaces the equipment supplier’s production capacity, even though Midas has since last year increased production output by adding three new production lines.
In a written comment, Midas's CEO, Patrick Chew, said the company believes that since its business and operations are principally located in China, a listing in Hong Kong will enhance its profile in China and Hong Kong and thereby strengthen its long-term growth prospects and development.
It will also "provide the company with an additional channel to raise capital and gain access to a wider range of institutional and retail investors”, he said.
The company is offering 18.58% of its enlarged share capital, or 220 million shares, including 90% new shares and 10% secondary shares.
The maximum offer price is HK$6.10 per share. Its Singapore-listed shares have been trading at an average of S$0.93 over the past three months, which is about 12.5% lower than the maximum price of HK$6.10, after taking the exchange rate into account. The Hong Kong offer price cannot be set below a 10% discount either to the closing price or the volume-weighted average price (VWAP) in Singapore on the day of pricing, so the final price will depend as much on how the stock trades between now and then as the level of demand.
The maximum offer price values the company at a price-to-earnings (P/E) ratio of around 19 times, according to analysts. By comparison, Midas's Singapore-listed shares are quoted at a P/E ratio of 20 times, based on its projected earnings for 2011. Hong Kong-listed China Railway Construction Corp is currently trading at 14 times 2011 earnings.
The deal could extend to $200 million if a 15% greenshoe option is fully exercised, in which case the company will sell 33 million additional shares.
The final price will be fixed on September 28 and a listing of the shares is scheduled for October 6. CCB International, Credit Suisse, and J.P. Morgan are arranging the deal.
Midas expects to receive approximately HK$1.27 billion of net proceeds (pre-shoe). It plans to use 65% of the money for capital expenditure and potential acquisitions, and 45% to improve the production capacity of its aluminium alloy business, the company said in a preliminary listing document.
Midas also exports aluminium alloy extrusion products to Europe and other Asian countries, but overseas sales contribute a very small proportion of its earnings. Its revenues are primarily generated from selling those products to railway companies in China. The company had revenues of S$150 million ($112.6 million) in 2009 and S$46.1 million in the first three months this year.
Midas listed on the secondary board of the Singapore stock exchange in 2004 and transferred to the main board in 2006.