Vinda lures investors with toilet paper growth story

The Chinese tissue paper manufacturer aims to raise up to $142 million in its Hong Kong IPO.
Vinda International, ChinaÆs leading tissue paper manufacturer, on Friday launched the institutional roadshow for a Hong Kong initial public offering that seeks to raise up to HK$1.1 billion ($142 million).

Vinda, which derives most of its revenues from toilet paper manufacturing, is presenting itself as a beneficiary of rapid tissue paper consumption growth in China as the population gets richer, arguing that tissue paper is a necessity to people leading a quality life.

The company is offering 300 million shares, or 35% of its enlarged capital, of which roughly 74% are new shares. The price will range from HK$3.18 to HK$3.68. A 15% greenshoe could further increase the deal size to $164 million.

The existing shares sold through the offering will come from Cathay Paper and Lee Der Fung, who will see their ownership fall to 9.9% and 4.9%, respectively after the IPO. Cathay currently holds 20.3%, while Lee Der Fung has a 12% stake.

The price range values Vinda at 26 to 31 times its 2006 earnings, which compares with fellow Hong Kong-listed paper manufacturer Hengan International Group at 41 times.

ôThe price range is reasonable. For an attractive industry segment, a valuation within 30 times should be reasonable,ö says one analyst. ôComparing Vinda and Hengan, HenganÆs product range is more diversified.ö

HenganÆs share price has more than doubled in the past one year, reaching a historical high of HK$28.75 on June 14. It fell approximately 10% last week, however, to a close of HK$26 last Friday following a prolonged upside since March.

Vinda is coming to market at a good time, with the Hang Seng Index rising five days in a row to reach a fresh historical close at 21,999.91 on Friday.

Vinda manufactures sanitary paper products, including toilet paper, paper handkerchiefs, facial tissue paper and paper napkins and has a sales network that covers 29 provinces in China. It also exports its products to places including Hong Kong, Macau, Australia and New Zealand. Exports accounted for 20.8% of its total sales last year. In 2006, 61.5% of its revenues came from the sales of toilet paper and 11.5% came from paper handkerchiefs.

ôItÆs a growing sector. Many companies in the industry are expanding their capacities,ö says the analyst. ôWhile there is fierce competition in the markets for diapers and napkins, it is generally believed that there is good growth potential in the toilet paper market. ThatÆs why Hengan chooses to sacrifice gross profit margin for volume increases, and is trying to commit more resources to toilet paper manufacturing.ö

According to RISI, a source of independent economic analysis for the international forest products industry, the total tissue paper consumption in China amounted to 4.1 million tonnes in 2005, representing 13% growth over 2004. Based on the information of the China Industrial Information Issuing Centre, Vinda had an approximate 14.7% share of the tissue paper market in China in terms of sales volume in 2006, compared with roughly 12% for Hengan.

VindaÆs net profit rose 29% to HK$58.4 million ($7.5 million) in 2005, and surged 83% to close to $14 million in 2006.

ôIt is expected that the company will enjoy high double-digit growth in profits this year,ö a source close to the deal projects.

The manufacturer has established a good brand name in China. According to the preliminary prospectus, the brand ôVindaö was recognised as the ôMost Influential Household Paper Brand in Chinaö in 2005 by the China Top 10 Most Influential Brands Selection Committee and as one of the ôTop 100 Most Valuable Famous Trademarks in Chinaö in the same year by the China Brand Research Institute.

ôAn established brand is important for a tissue products manufacturer to expand in such a fragmented market,ö says another analyst.

Competition is indeed on of the key risks, especially within the markets for diapers and napkins.

ôBeing a fragmented market, itÆs difficult for a single manufacturer to get a majority share of the market (and) itÆs difficult for manufacturers to raise the selling prices,ö the analyst continues. ôThey have to go for volume increases with lower prices, but inevitably gross profit margins will be negatively affected.ö

The analyst notes that in first-tier cities, markets have been largely taken over by foreign brands like Procter & Gamble and Kimberly-Clark Corp., while local brands like Hengan have substantial market shares only in second- or third-tier cities. The same situation should apply to Vinda.

The deal doesnÆt have any cornerstone investors, but Swedish SCA, EuropeÆs largest and the worldÆs third largest supplier of tissue paper, bought 20% of the company in March at a price of HK$2.84 per share. Its share of the company will be diluted to 14.85% after the offering. Alongside SCA, Cathay Paper and Lee Der Fung, the Vinda management will hold 31.7% and Merrill Lynch will hold 3.7% of the company post-IPO.

Merrill Lynch is also the sole bookrunner for the offering, which will have the usual structure with 90% of the issue going to the institutional tranche and 10% to retail investors. There is also a standard clawback mechanism that may increase the retail tranche to as much as 50% in case of heavy oversubscriptions.

Most of the net proceeds will be used to increase production capacity, but part of the money will also go towards the repayment of short term loans. The final price will be determined on June 30 and trading debut is scheduled for July 10.
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