Smaller Hong Kong listing candidates fight for attention

Yingde Gases, China Vanadium, Ausnutria Dairy and Wuzhou Shenguan Protein Casing aim to raise a combined $1.1 billion.

Another Monday, another batch of listing candidates hits the road. While investors are still waiting for the first Hong Kong initial public offering this side of summer to start trading, the number of companies in the market continues to grow. Yesterday saw another four companies start bookbuilding with the aim of raising a combined $2.9 billion, which brings the total amount of funds sought by the nine companies currently on the road for a Hong Kong listing to $6.2 billion -- well above the $3.6 billion that was raised in the Hong Kong market in the first eight months of the year.

Since then, pharmaceutical products distributor Sinopharm has raised $1.13 billion and engineering and construction firm Metallurgical Corporation of China has tapped the market for $2.35 billon, meaning investors have already poured quite a lot of money into the Hong Kong market this month.

However, bankers believe there is enough appetite and funds to cover all the deals as long as the secondary market remains reasonably supportive. Certainly, nobody is doubting that investors will have cash to spare for the large, high-profile deals, but the story may be slightly less obvious for the smaller, less known companies, which may have to fight a bit harder to get heard.

The two largest deals to hit the road this week are casino operator Wynn Macau and commercial property developer Powerlong Real Estate Holdings, which are seeking to raise a combined $2.3 billion (see separate stories on our website today). But behind them are a number of companies from rather unique industries that bankers argue are also worth a look.

Yingde Gases

The largest among them is Yingde Gases Group, which produces various gases that are used for the production of steel and chemicals. The Shanghai-based company is aiming to raise between HK$2.73 billion and HK$3.58 billion ($352 million to $462 million), most of which it will use for the construction of new production facilities and equipment purchases. About 18% will go towards business development and 10% will be used as working capital.

Typically, Yingde Gases will construct a production facility at or next to the site of a steel plant or chemicals factory where it will separate air into nitrogen, oxygen or argon according to the needs of the customer's particular production process. This means it is quite a capital intensive industry, but one that tends to have very long-term contracts, often more than 15 years, a steady revenue base and good earnings visibility.

Although it has been in operation for only six years, Yingde Gases is the largest domestic Chinese company in its industry, and the second largest producer of industrial gases in China behind Germany's Linde. This puts it in a good position to take advantage of the fact that China's steel and chemicals industries are expected to continue to grow strongly -- thus needing more of its gases. There is also a growing trend towards outsourcing, whereby steel and chemicals companies that used to produce their own gases are streamlining and choosing to buy from external suppliers.

Regarded as a nationwide player, Yingde Gases currently has several projects under construction and according to sources, is expected to grow faster than the industry as a whole.

The company is offering 25% of the company in the form of 452.31 million shares at a price between HK$6.03 and HK$7.91. Having previously done a round of pre-IPO funding, 25% of the shares will be secondary to give the existing investors, including Barings Private Equity and Deutsche Bank, an opportunity to sell. The price range values the company at 12.8 to 16.8 times its 2010 earnings on a post-money, post greenshoe basis. This is a higher valuation than for Hong Kong-listed XinAo Gas and China Gas Holdings, which trade at 12.7 times and 12.3 times respectively, but investors agree that this is warranted because of Yingde Gases' larger size and market leading position. International peers like Linde or France's Air Liquide also trade at lower multiples due to their slower growth profiles.  

Yingde Gases is being brought to market by Goldman Sachs and Morgan Stanley. The final price is expected to be fixed on September 30 and the trading debut is scheduled for October 8.

China Vanadium

A few days ahead in terms of marketing is China Vanadium Titano-Magnetite Mining, an iron ore mining company which started its roadshow on Thursday last week. It is seeking between HK$1.84 billion and HK$2.27 billion ($237 million to $293 million), which will go towards the acquisition of mines, extension of mining boundaries, and the construction and upgrading of production lines.

The company is an iron ore producer strategically based in the Sichuan province where demand for iron and steel is expected to remain strong due to the reconstruction work in the wake of last year's earthquake. The government has issued a policy that encourages the use of steel strengthened by vanadium for construction in earthquake zones, which is extremely positive for China Vanadium since its iron ore is naturally rich in vanadium and doesn't need to be artificially strengthened. According to a source, China Vanadium has already pre-sold its production until 2010.

The company owns majority stakes in two mines with 78.66 million tonnes of proven and probable reserves based on the Joint Ore Reserves Committee (JORC) code. It plans to complete an expansion of its existing assets by adding a 300,000 tonnes per annum production line and also has an option to acquire another five mines in the area with estimated resources of 126.2 million tonnes. Longer-term, the company is likely to be one of the main consolidators in the industry, sources say.

It is offering to sell 588.8 million shares, or 25% of the company, at between HK$3.12 and HK$3.86 per share. Some 84.9% of the shares are new, while 15.1% are secondary. The same split also applies to the 15% overallotment option. The price range values the company at 10.2 to 12.6 times its projected 2010 earnings on a fully-diluted, pre-shoe basis, based on the bookrunners' consensus. The closest comparable is deemed to be Hidili Industry, a Hong Kong-listed producer of coke and coking coal -- the other key raw material used to produce steel -- which is of similar size and also based in the Sichuan province, has a strong organic growth profile and is viewed as a consolidator in its industry. Hidili trades at a P/E multiple between 15 and 16 times.

China Vanadium is being brought to market by Citi and Deutsche Bank. It too is expected to fix the price on September 30 and start trading on October 8.

Ausnutria Dairy

A Chinese baby milk producer, Ausnutria Dairy Corporation is a company that imports all of its milk powder from Australia and then packages it in China. As such, it offers a high-end product targeting the emerging middle class. This is key since food safety is still a major concern for parents one year after the Chinese milk poisoning scandal put thousands of babies in hospital. Ausnutria has a 2.25% market share.

The roadshow for its IPO started yesterday. The company is expecting to raise between HK$1.11 billion and HK$1.53 billion ($143 million to $197 million) by selling 300 million shares for between HK$3.70 and HK$5.10 each. The price range values the company at between 11.3 and 16.4 times its projected earnings for 2010. Although there are no other listed Chinese companies that focus solely on milk powder, there is a US company, American Dairy, that does. The latter trades at about 8.6 times 2010 predicted earnings. Among the Hong Kong-listed entities, the closest comp is probably China Mengniu Dairy Company, which is currently trading at about 22.6 times.

Ausnutria intends to use around 30% of the net proceeds to invest in upstream milk powder-related assets, while another 30% will be used to strengthen its distribution network and for brand-building purposes. The rest of the money will be split between research and development, introducing new products, establishing two productions lines, and working capital.

Bank of China International and Macquarie are joint bookrunners. Following the lead of Yingde Gases and Chan Vanadium, the pricing is scheduled for September 30 and the debut on October 8.

Wuzhou Shenguan Protein Casing

By far the most unusual IPO in the market at the moment, Wuzhou Shenguan Protein Casing is a company that makes the coating (think skin) for sausages. Although only 10% of China's sausages use this kind of protein casing, Wuzhou Shenguan has 55% of that market. Its clients include a number of the major Chinese meat producers, such as China Yurun Food Group.

The company, which is looking to raise around $150 million, is still at the pre-marketing phase, but plans to open the order books on Friday (September 23). The final pricing is expected on October 6. Wuzhou Shenguan has mandated Macquarie to arrange its IPO.

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