Xiamen Ports launches roadshows

China port operator hopes ''pure'' appeal will draw investors.

Chinese port operator, Xiamen Ports, is hoping recent momentum in the Hong Kong IPO market will counter the continuing poor performance of global shipping stocks. The BNP Paribas Peregrine led deal is aiming to raise HK$1 billion ($130 million) to HK$1.28 billion ($156 million) from its IPO based on a price range of HK$1.18 to HK$.142 and issue of 858 million shares.
Pricing is scheduled for December 9.

It now seems likely the company will list as a conventional H-share, despite speculation it would list with all of its government-owned shares freely convertible into H-shares. However, specialists say that technical issues with the stock exchange in Hong Kong mean that final confirmation of the listing format is not possible.

Under a conventional H-share offering, 90% of the shares sold to foreign investors will be new, while 10% will comprise old shares. Proceeds from the old share tranche revert back to the government, the main shareholder, which then injects them in the state social security system. It is only with special permission that the 10% of old shares (theoretically non-tradable) can be sold to investors.

China Shipping Group has already promised to take 5% of the company, which should translate into a 15% strategic stake in the offering. Pre-shoe, the float will stand at 32.88%.

The pricing range equates to a 2005 p/e ratio of 13.3 to 16 times. Says one specialist, "Pure operators, both in China and abroad, trade on p/e ratios of 15-18 times. Hong Kong-listed operators such as Cosco Pacific and China Merchants underperform these ratios because they're not 'pure' operators. They also have extensive container storage operations."

He adds that pure port operators such as Shanghai Ports and Shenzhen Yantian trade at 16 times and 19 times respectively.

Some 39% of the proceeds will be used to acquire three berths off its parent in the unfinished development of Haichang, one of four port developments in Xiamen and its environs. Two out of the five berths at Haichang are already being operated by the listco in a joint venture (Xiamen International Container Port) with Hutchison Whampoa.

The JV split is 51%-49% in favour of Xiamen Ports. Haichang will be completed next year.

The parent has also started a joint venture for the development of Songyu, the final port development in Xiamen, with the largest shipping company in the world, Maersk Seeland. The listco will have first right of refusal on any project run by its parent, with regard to buying, leasing or managing.

Any asset injection will depend on the listco's financial situation, says a specialist. The A-share entity owns 100% of Dongdu (which has four berths), the second of the four major port developments in Xiamen, and seven of 11 berths in Haitan, the third port development.

The listco's parents has a 77% market share in Xiamen, and a 66% market share for the wider province of Fujian. Some 39% of the proceeds will be used to pay off bank loans, and the remainder will be used for working capital.

The listco's structure is a little complicated, since it was originally a roads and bridges infrastructure operator. Thanks to a recent asset swap with the Xiamen city government, the infrastructure assets were replaced with port and port services assets, such as the ports operations, ship agency, tugboat services, tallying, and logistics.

These assets were injected into the domestically (A-share) listed company (Xiamen Ports Development), in which the listco will have 55.1% stake. Investors are reportedly bullish about the company's growth prospects, given China's booming trade sector. They also see the port at a good distance from the large ports in Shanghai in the north and the Guangdong ports in the south.

The company made Rmb 232.7 million ($28.3 million) in net profits in 2004, or Rmb 211 million on a post-swap adjusted basis, and is expected to make Rmb 241 million in 2005. The company boasts profit margins of 46.3% for the first seven months of this year, operating margins of 37.5% and net margins of 30%.

Net profit has grown 15.3% on a CAGR basis since 2002.

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