Wah Kwong float attracts two cornerstones

The Hong Kong ship owner aims to raise up to $164 million to fund an aggressive expansion of its dry-bulk fleet.
Small-scale ship owner Wah Kwong Maritime Transport Holdings is aiming to raise between HK$972.5 million and HK$1.28 billion ($125 million to $164 million) from its initial public offering and has attracted two cornerstone investors to the deal, sources said yesterday.

The final investment amount has yet to be determined, but Hong Kong-based commodities trading firm Noble Group and Taiwanese bulk shipping firm U-Ming Marine Transport Corporation have both agreed to support the IPO and are expected to take up around 10% of the total offering. U-Ming already has a relationship with Hong Kong-based Wah Kwong in that it is a joint owner of some of Wah KwongÆs dry-bulk vessels. Noble and U-Ming will both be locked up for six months, while the majority owner will have a 12-month lock-up.

Wah Kwong currently has a fleet of 11 dry-bulk ships and tankers, of which three are wholly-owned and six are held through 50-50 joint ventures. In two of the ships it has a minority stake only. The company also has another 11 dry-bulk vessels on order that will start to come on stream early next year and will increase its combined dead-weight tonnage by 52% from the current 1.8 million dwt.

It is offering 25% of the company in the form of 125 million new shares, plus a greenshoe of 15% that could boost total proceeds to as much as $188 million. Ten percent of the deal will be set aside for Hong Kong retail investors, while the rest will be offered to institutional investors and the two cornerstones.

The price range has been set at HK$7.78 to HK$10.20, which values Wah Kwong at 5.3 to 6.95 times its projected earnings in the fiscal year to March 2009. While not directly comparable, as its peers all operate on a calendar year, the price range implies a sizeable discount compared with the likes of China Shipping Development, which trades at a 2008 P/E multiple of 12.5 times, U-Ming at 8.5 times and Taiwan-based Sincere Navigation at 10.4 times. Pacific Basin is the closest in terms of valuations at 5.8 times this yearÆs earnings.

China Shipping Development is considered the most direct comparable as it has a similar mix of bulk carriers and tankers as Wah Kwong, although with 135 dry-bulk ships in operation, it is much larger than the listing candidate. The other three are primarily active within bulk shipping.

For investors who prefer to look at the shipping sector on a net asset value basis, the stock is looking even cheaper. According to a source close to the offering, the price range indicates a valuation ranging from a 20% discount to NAV to a 20% premium for Wah Kwong, while its regional peers trade at 50%-60% premiums to NAV. While relative value is obviously good from the investorsÆ point of view, the generous discount to the peer group does suggest that the feedback from 2.5 weeks of pre-marketing revealed that investors are still unwilling to commit money to IPOs unless they are cheap.

Shipping stocks have been on a downward trend over the past week in response to record high oil prices and a key question will be if investors are able to look beyond this issue when it comes to Wah Kwong. The company hires out its ships out on a time charter basis, which means it is responsible for operational costs such as crew wages, insurance premiums, repair, maintenance and lubricants. Fuel costs are, however, typically covered by the charterer, and thus Wah Kwong has very little exposure to crude and bunker fuel price risks. By using time charters with contract periods of up to five years, it also has lower exposure to spot rates. One syndicate analyst projects that bulk rates will remain at similar high levels this year as in 2007, but fall 30% in 2009 as the global supply of bulk carriers is set to increase.

It is, however, very much a beneficiary of the strong demand for commodities in China and other emerging markets and in recent years Wah Kwong has been shifting more of its capacity towards dry-bulk and away from tankers. Of its existing fleet, only four ships are tankers although they still account for 56% of the dead-weight tonnage. This ratio is about to change though as the new ships on order are all dry-bulk vessels.

Other selling points, sources say, are Wah KwongÆs young fleet, which at an average 2.3 years is one of the youngest in the world, making it more cost efficient than some of its larger rivals with better margins and higher returns on equity. The company has also made it part of its business model to sell older vessels in the second-hand market, allowing it to realise gains when asset prices are high.

The listing candidate is majority-owned by the Chao family, which has been in the shipping business for more than 50 years, accumulating valuable knowledge of how to read the market to maximise the returns from such disposals. The day-to-day business is run by a professional management, however.

Despite the expected downturn in bulk rates in 2009, syndicate analysts argue that Wah KwongÆs aggressive fleet expansion will help underpin strong growth in the coming three years, especially since the charters that are up for renewals in 2008 and 2009 should be able to be secured at substantially higher rates than the existing contracts. The company has locked in 88% of its capacity for fiscal 2009 and 47% for fiscal 2010, resulting in a highly visible growth profile. One analyst expects earnings will expand at a compound annual growth rate of 23% from fiscal 2008 onwards, following about 10% growth to a projected $36 million in the year just ended.

Alongside the cyclical nature of the shipping sector, one of the key risks, observers say, is that Wah Kwong derives about 90% of its revenues from a handful of customers. This could leave it very exposed if one or two of them decided not to renew their long-term contracts.

The deal, which is arranged by Anglo-Chinese and Cazenove, will stay open until June 3 and will price shortly thereafter. The listing is scheduled for June 11.
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