Sinoma braves jittery market with $538 million IPO

The company is expected to benefit from China's ongoing construction boom as well as planned consolidation within the cement industry.
The Hong Kong stock market has undoubtedly been getting tougher in recent weeks and more and more investors are putting up the shutters to avoid making an investment that could leave them with a loss-making position at the end of an otherwise strong year. But that isnÆt stopping the last batch of listing hopefuls from trying to complete their initial public offerings before Christmas.

And bankers are adamant that there is still enough demand and liquidity to see them across the finishing line û as long as the valuations are reasonable, that is.

Among those lining up is the worldÆs largest cement equipment and engineering service provider, China National Materials Company, also known as Sinoma. It is the only fully integrated company in the non-metals materials industry in China and as such an obvious beneficiary of the countryÆs ongoing construction boom. Its businesses range from research and development and industrial design to engineering, construction services and production.

The company, which kicks off the institutional roadshow for its IPO today, is aiming to raise between HK$2.98 billion and HK$4.19 billion ($383 million to $538 million) by selling 27.2% of the enlarged share capital and looks to have set the price range at a level that should generate enough demand at the bottom half at least. This suggests the state-owned company has learnt something from the disappointing debuts of Sinotrans and Sinotruk, which have both traded down significantly after pricing their respective offers at the top of quite demanding ranges that were set when the markets were looking a lot more favourable.

Shipping company Sinotrans fell 13% on its first day on November 23, while heavy duty truck manufacturer Sinotruk dropped 15.7% on its debut last Wednesday. As of last Friday, Sinotrans was trading 16.1% below its issue price, while Sinotruk had recovered somewhat but was still down 5.1%.

ôIf the markets continue to trade up and the Fed cuts by 25 basis points then this could become a momentum trade and go very well,ö one source says of Sinoma, while recognising that if the backdrop turns negative, the interest will likely thin out and become more price sensitive. ôBut at the lower half of the price range the deal should have no problem,ö he adds.

The US Federal Reserve is due to hold its next rate-setting meeting on December 11, one day before Sinoma closes the books on its offering. The final price is also expected to be determined on December 12 and the trading debut is scheduled for December 20.

The company is offering 931.708 million new H-shares at a price of HK$3.20 to HK$4.50 apiece. The range values it at 15.9 to 22.4 times its 2008 earnings, based on the consensus estimates by bookrunners BOC International and UBS.

This puts it at a significant discount to China National Building Materials (CNBM), which is considered the closest comparable because of its similar integrated business mix. CNBM has had a spectacular run with its share price up 11-fold since it listed in Hong Kong in March last year, including an 8.9% rally on Friday. It currently trades at about 40 times next yearÆs earnings. Anhui Conch Cement, which is more focused on cement production, trades at around 28 times in the H-share market.

SinomaÆs offering includes a 15% greenshoe that could boost the total offering size to as much as $620 million. The deal has the usual 10% set aside for retail investors but standard clawback triggers apply which means the retail tranche could increase to as much as 50% if demand is strong.

The deal is about 21.5% covered already as the company has signed up six cornerstone investors who will take up a combined 200 million shares split evenly between them. Depending on the final price, this will translate into an investment of between $82 million and $115 million.

The cornerstones, which have all agreed to a 12-month lockup, are: CCB International Asset Management, which is a unit of China Construction Bank; China Life Insurance; CII, which is owned by infrastructure contractor China Communications Construction and Silver Grant International; Citigroup Global Markets; Grahamstowe Investments, an investment vehicle owned by Leslie Lee Alexander who is the owner of the Houston Rockets basketball team; and the Government of Singapore Investment Corp.

Aside from the cement equipment and engineering division, which accounted for about 46% of operating profit in the first half of this year, Sinoma also produces glass fibre, cement and high-tech materials. The latter includes specialty fibre, fibre reinforcement composite materials and advanced ceramics.

Investors are said to like the issuer because of its dominant position within cement equipment and engineering, where it commands a 22% share of the global market outside of China and 90% of the domestic market, based on the aggregate annual kiln capacity for cement.

However, the company has a strong position within all its four segments and ranks as one of the five largest producers of glass fibre in the world and the third largest in China. It is also the largest cement supplier in the Xinjiang Autonomous Region, with a 39% market share, and a major player in the Pearl River Delta. It has an annual production capacity of approximately 17 million tonnes of cement and is designated by the Chinese government as the only producer of standard sand, a material used in the grading of cement, for all Chinese cement manufacturers.

In addition, it has developed its own New Dry Process for cement production, which according to syndicate analysts is more energy efficient, has more stable product quality and meets strict environmental requirements.

Within the high-tech materials segment, it is the only domestic producer of high-strength glass fibre materials.

Among the key growth opportunities is the aim by ChinaÆs National Development and Reform Commission (NDRC) to reduce the number of cement producers in China to 3,500 in 2010 from 5,100 in 2005 and to raise the cement output produced through the New Dry Process to 70% in 2010 from 50% in 2006.

One syndicate research report projects that this will lead to an investment of Rmb246 billion ($33 billion) in New Dry Process cement capacity between 2007 and 2010.

ôOverseas markets also present huge opportunities for Sinoma, with new demand expected from developing countries and replacement demand from developed countries,ö the report notes. ôSo far in 2007, the company has already signed new contracts with a total value of more than Rmb19.7 billion, at least 10% higher than (the new contract value) for the full year 2006.ö

The analysts expect Sinoma to post a net profit compound annual growth rate of 50% for 2007-09.

Among the potential concerns for investors to consider are the appreciation of the renminbi and the negative implications that this may have on the companyÆs exports, increasing competition within cement and glass fibre production and small volumes in the high-tech materials segment that donÆt yet justify mass production. Three of SinomaÆs operating subsidiaries are also listed in ChinaÆs A-shares markets, which could make the companyÆs valuation susceptible to large swings in these markets.

After the listing, parent company China National Materials Group will hold about 43.8% of the company.
¬ Haymarket Media Limited. All rights reserved.
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