One of China's principal diesel engine manufacturers Weichai Power Co Ltd will take a step closer to its approximately $100 million IPO on Monday February 9 when pre-marketing gets underway via joint global co-ordinator CLSA and sponsor and book runner Citic Capital.
Pre-marketing will run through to February 17 when an indicative price range will be announced. The public offering will run from February 26 to March 2. The 110 million share offering will have the standard 90:10 split between the private placing and a public offer.Bankers will be using New York-listed China Yuchai International (CYD) as one point of comparison. Yuchai trades at 15 times 2004 earnings and is a direct competitor of Weichai's. However, the former has a much longer track record.
The target P/E ratio for Weichai is also around 15 times earnings, although bankers concede it is quite ambitious for a manufacturing company given the average on the Hong Kong stock exchange is nearer 10.
One of the company's main selling point is its 70% market share in the heavy truck segment of the diesel engine market.
Weichai reported net profits of Rmb 277 million ($33.5 million) in 2003, up from Rmb 167 million ($20.2 million) in 2002, on a turnover of Rmb 3.55 billion ($429 million). No 2004 forecast has yet been made.
"The offering will be priced conservatively initially, and then we'll see what the reaction is," says one banker, who noted however, that the company had a good focus and has seen dramatic growth.
"The kind of heavy duty diesel engines Weichai produces are heavily leveraged into China's auto and construction industry," he adds.
Both sectors saw up to 30% year-on-year growth in 2003.
The listing date will come during the same period as the first quarter results of Hong Kong's H-share companies.
"Yuchai's results will be very good. However, following the maxim of "buying on rumour and selling on fact," even if the results are very good for other H-shares, investors may decide to cash in their profits," says one banker.
In addition, the mainland government has shown signs of applying the brakes to China's fixed asset investment boom. It recently increased banks' reserve requirement from 6% to 7%, for example.
The company is located in one of China's richest northern provinces, Shandong, sometimes known as the Scotland of China for its thrifty and hard working population. The company plans to use the proceeds to expand its manufacturing capacity.