China's national transportation and logistics company, Sinotrans, will start roadshows in Singapore on Thursday for its IPO. After four days in Europe and four in the US, the joint leads, Bank of China International and Credit Suisse First Boston plan to close books on February 7th and price on February 10th.
The deal will be a minimum of $400 million in size, but could be as large as $500 million post-greenshoe - with the company planning to sell 38.5% of its enlarged share capital. However, almost a quarter of the deal will be sold direct to at least three strategic investors.
The price range was not firmed up as of yesterday (Tuesday), but it is thought that a valuation of around 13 times earnings will offer the midpoint. The valuation issue is complicated by the fact that global comparables are trading in erratic ranges and H shares have recently surged.
However, in the words of one banker, "There are no perfect comparables for this company".
Founded in 1950, Sinotrans is an arm of the Ministry of Foreign Trade and Economic Co-operation (Moftec) and is officially known as China National Foreign Trade Transportation group. The parent company is a huge and geographically sprawling giant with about 67,000 employees, $2.66 billion in assets, 52 subsidiaries, 508 independent management companies and 238 joint ventures. Its businesses span the whole gamut of transportation and its associated logistics including shipping, freight forwarding (it owns over a dozen port terminals), rail transportation, road transportation (it has its own trucking company) and warehousing.
Transport logistics in China is also a fairly inefficient industry accounting for about 12.5% of the cost of goods compared to only 2.5% in more developed markets.
However, the listco has been deliberately kept asset-light and has been carefully stripped down to just a few key physical assets such as strategic warehouses and only about 15,000 employees. It will house three main businesses: freight forwarding, shipping agency services and express services - the latter largely through Sinotrans' shareholding in Shanghai-listed SinoAir, which contains three express delivery JVs.
Revenue for the first half of the year totaled Rmb6 billion ($725.5 million), of which freight forwarding accounted for Rmb4.5 billion ($544 million), express services Rmb520 million ($63 million) and marine transportation Rmb740 million ($89.5 million). First half profit amounted to Rmb293 million ($35 million).
Seven mainly coastal provinces and municipalities have also been cherry picked and comprise: Shanghai; Jiangsu, Zhejiang; Shandong, Tianjin, Guangdong, Fujian and Liaoning. Industry specialists also comment that while there is potential for future asset injections, the restructuring work needed in many of the inland provinces means that only a couple are likely to be included over the short to medium term.
The company is likely to be pitched as a growth play rather than a restructuring play and its main appeal lies in its unique spread across the whole logistics industry. The company will also pay out around 50% of net income as dividend, which should give the company a comfortable yield.
Sinotrans has several foreign joint-venture partners - such as DHL, UPS and Exel Logisitics - and these are reckoned to be the most likely to be named as the strategic investors in the company, and could buy as much as $150 million of the deal. They will be subject to a 12 month lock-up.
This will be one of those situations where investors may take an even greater degree of comfort than usual from the presence of the strategics. That's because China last week responded to WTO by announcing that from next year foreign companies will be allowed to own 75% of JVs in the logistics and transportation area.
The foreign firms are currently in 50/50 JVs with Sinotrans, raising speculation that they may try to go it alone with a new JV partner. The new regulation has also eliminated a barrier to entry for new players too.
However, Sinotrans has been around for 50 years, and thus has a lot of business relationships. Any new entrant from abroad will have to deal with customs and excise licensing issues and contemplate how to deal with the dilemma of lacking a physical infrastructure. Sinotrans, on the other hand, while structured as an asset-light vehicle, can use existing relationships with its parent to get round this problem.
The strategic investors seem to have signaled that they see the best opportunities in maintaining their links with Sinotrans and its parent - a conclusion reinforced by the fact that they are committing their investment dollars publicly as a show of faith.
However, sceptical investors will no doubt focus on the issue of future competition during the company's roadshow.