Sinotrans prices at top on positive outlook

Expectations of continued strong demand for dry-bulk goods offsets the impact of volatile markets, allowing the shipping company to raise $1.47 billion.
Chinese shipping services provider Sinotrans Shipping has priced its Hong Kong initial public offering at the top of the range for a total deal size of HK$11.45 billion ($1.47 billion) after investors seemingly chose to ignore the current volatility in the local market and focus instead on the positive outlook for dry-bulk freight rates.

ôMost people are positive about freight rates for 2008 and going into 2009, and while they are not so sure after that, this is beyond most peopleÆs immediate investment horizon anyway,ö one source remarks.

The Baltic Dry Index, which is the benchmark gauge of dry cargo freight rates, has soared from about 3,000 points a year ago to more than 9,000 points today as China in particular continues to import vast quantities of various commodities to support its rapidly growing economy.

Observers also noted that some investors may have felt more comfortable submitting orders since Sinotrans had more shares to allocate to institutions than some of the other recent newcomers after receiving a waiver that allowed it to cap the retail portion at 25%. Zhong An Real EstateÆs poor trading debut last week û despite a book that was multiple times covered û is believed to have been due to the allocations having been spread too thin. As a result, too many investors were left with too few shares to make it worthwhile holding on to them.

The property developer traded below its HK$6.67 IPO price for most of its first trading day last Tuesday, but pushed higher towards the end and closed 4 cents above issue price. On the second day, it reached an intraday high of HK$7.13, but since then it has been under pressure and on Friday closed at HK$6.45 û 3.4% below issue price. The decline came as the volatile Hong Kong market fell 5.3% over the past three sessions amid a resurgence of concerns about a global credit crunch.

Still, the institutional portion of Zhong AnÆs $467 million IPO was about 85 times covered post clawback and after deducting the $110 million cornerstone tranche, which suggests there ought to have been sufficient excess demand to support the stock in the aftermarket û even in the current volatile environment.

SinotransÆ offering was larger, which meant the $175 million cornerstone tranche made less of a dent in the number of shares available for allocation, but sources say the clawback waiver was even more important. This meant that even though the retail portion of the deal was 252 times covered, retail investors received only a quarter of the stock, compared with the usual 50%, leaving no less than $927.5 million for institutional investors other than the seven cornerstones.

This remaining portion ended up being about 85 times covered, according to one source who said there was also virtually no price sensitivity in the order book.

Consequently, it wouldnÆt have been too tough a decision to price the deal at the top of the HK$7.18 to HK$8.18 range even though some of the comparables were under significant pressure during the two-week roadshow. Integrated shipping companies China Cosco Holdings and China Shipping Development fell by 8.9% and 14.6% respectively.

The IPO price values Sinotrans at 14.1 times its projected 2008 earnings, which puts it at a discount to China Cosco at 18.5 times, but at a slight premium to China Shipping at 13.8 times. It is also coming to market at a premium to Hong Kong-listed dry bulk shipping company Pacific Basin, which was quoted at 10.3 times on Friday, according to Bloomberg data.

Sinotrans is an integrated shipping company with both oil tankers and container vessels in its fleet, although most investors regarded it primarily as a dry-bulk shipper, give that it derives about 75%-80% of its earnings from the dry-bulk segment. It currently has 26 dry-bulk vessels that are used to transport goods such as iron ore, coal, grain and steel products, versus three very large crude-carriers (VLCC) and five container ships.

The company sold 1.4 billion new shares, or 35% of the total share capital. The deal also has a 15% overallotment option, which could boost the total proceeds to as much as $1.68 billion if exercised in full. BOC International and UBS were joint bookrunners on the offering.

Investors were said to have liked the fact that the companyÆs fleet is younger than the industry average as this typically means that the operating costs are lower and that there will be less need for replacements in the short-term. They also put quite a bit of value on the companyÆs brand name and the groupÆs long-standing relationships with both customers and shipbuilders û a definite positive when it comes to getting deliveries on schedule at times like these when most ship owners are ramping up.

Sinotrans Shipping is a subsidiary of state-owned China National Foreign Trade Transportation (Group), also known as Sinotrans Group, which was formed in 1950 and ranks as ChinaÆs largest transportation and logistics services company. The parent will hold 65% of Sinotrans at the time of listing.

The fact that contracts for 45% of SinotransÆ dry-bulk fleet are up for renewal within the next year is expected to be a key earnings driver as it should allow the company to capture the surge in spot market rates over the past 12 months. According to one syndicate analyst, this should lead to a 16% rise in net profit this year followed by a 115% gain in 2008.

The company posted a net profit of $119 million in 2006 on the back of $248 million of revenues and expects this yearÆs bottom line to be at least $126 million, based on a first-half profit of $57.6 million.

It has also placed orders for 13 new vessels, comprising eight dry-bulk vessels, four container ships and one double-hull oil tanker that will be bought by its 50% owned MS Tanker subsidiary. These ships will be delivered between 2008 and 2011 and will be part of the companyÆs plan to increase its dry-bulk shipping capacity to 4 million-5 million dead-weight tonnes (DWT) in the next five years from 1.3 million DWT today.

The stock is due to start trading on November 23.
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