Strong book gives Sinoma confidence to price high

The cement equipment company records oversubscription numbers in the 100s and is the first listing candidate since China Railway to carry out a full clawback.
China National Materials Company, the worldÆs largest cement equipment and engineering services firm, has provided further proof that investors are still willing to invest in what they perceive to be good quality companies in high-growth sectors. Contrary to the muted response received by seven of the other eight companies that have attempted a Hong Kong listing so far this month, the producer of non-metal building materials was in strong demand by both institutional and retail investors.

According to a source, this gave China National Materials, which is known as Sinoma, the confidence to fix its IPO price at the top of the range, becoming the first Hong Kong listing candidate to do so since China Railway Group on November 30. The fact that the book contained virtually no price sensitivity would have further underpinned this decision, although because so many of the most recent IPOs are currently trading below issue price, the company ought to have been careful about being too aggressive.

This is especially true since the stock wonÆt start trading until December 20, by which time investors are likely to be even more hesitant about adding to their exposures.

The final price of HK$4.50 per share will result in a total deal size of HK$4.19 billion ($538 million).

The large deal size may have indirectly contributed to the interest as û in the current volatile environment - many investors seem more comfortable to buy into deals that are liquid, in case the share price starts sliding and they need to get out quickly.
Liquidity is unlikely to have been much of an issue for retail investors though, but according to the source, they too moved into the transaction in numbers that was reminiscent of the IPO hype seen a couple of months ago.

The retail tranche was 266 times covered, making this the only Hong Kong IPO this month to see a full clawback, except for China Railway. In fact, only one other deal, Anton Oilfield Services, has had a clawback since all of the other offers have had retail subscription rates in the single digits. AntonoilÆs $126 million offering attracted retail orders for 16 times the shares earmarked for them, triggering a clawback that led to an automatic increase of the retail tranche to 30% of the deal from 10% initially.

SinomaÆs retail tranche will increase to the maximum 50%. After adjusting for this and the $115 million cornerstone tranche, the remaining institutional tranche was 165 times covered, the source says.

ôThis is a very solid company with a good management. It is also one of these companies that have a good cash flow and a dominant market share in a growing sector, which means the credit quality is high,ö one observer says, adding: ôThere isnÆt really much downside.ö

Perhaps more importantly, the stock is valued at a discount to the major comparables even at the top of the price range. Based on the consensus earnings forecasts by joint bookrunners BOC International and UBS, the stock will come to market at a 2008 price-to-earnings ratio of 22.4 times, while China National Building Materials û an investor favourite ever since it came to market in the first quarter of 2006 û is quoted at 42.5 times. Anhui Conch Cement trades at 24.4 times, although its business really only overlaps with one of SinomaÆs five business lines.

SinomaÆs vertically integrated businesses range from research and development and industrial design to engineering, construction services and production.

The company sold 27.2% of its enlarged share capital, or 931.708 million new H-shares. The deal includes a 15% greenshoe that could boost the total offering size to $620 million. Parent company China National Materials Group will hold about 43.8% after the IPO.

The six cornerstones bought a combined 200 million shares split evenly between them in return for a 12-month lock-up. The investors were: 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.

The company has a leading 22% share of the global market for cement equipment and engineering outside of China and 90% of the domestic market, based on the aggregate annual kiln capacity for cement. Aside from this part of the business, 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.

Syndicate analysts expect Sinoma to post a net profit compound annual growth rate of 50% for 2007-09 and argue that it will remain a key beneficiary of ChinaÆs ongoing construction boom.
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