The China effect

The China effect
Published: 20 May 2008

Shares of Asia Cement (China) Holdings were up 44% at the midday break on their Hong Kong debut Tuesday, boosted by strong demand for cement to be used in reconstruction after last week’s earthquake in Sichuan province. Asia Cement was at HK$7.15, compared with its initial public offering price of HK$4.95, which was near the lower end of an indicative price range of HK$4.85-HK$6.45. The benchmark Hang Seng Index dropped 1.9% to 25,260 on profit-taking following a nearly 680-point gain in the previous five sessions. Analysts expect the stock to find support at HK$7 in the near term. The company, a spinoff from Taiwan’s Asia Cement Corp raised US$238 million in its IPO by selling 375 million new shares, or 25% of its enlarged share capital.  Asia Cement said it will use the proceeds of the IPO for capacity expansion, loan repayments, strategic investments and working capital.

Asia Cement’s shares are now trading around 29 times the company’s forecast 2008 net profit. In comparison, Anhui Conch Cement Co., China’s largest cement producer by output, is trading around 29 times 2008 earnings and cement producer China National Materials Co. has a price/earnings ratio of 36, according to Thomson Reuters data. KGI Asia analyst Libbie Lai expects the company to benefit from the strong demand for cement. ’Its fundamentals aren’t bad given its higher average selling price for cement and gross margins,’ Lai said. ’(But) Asia Cement has a smaller merger and acquisition potential than its peers,’ he added. Lai expects the company’s cement capacity to rise to 16 million tons by 2009 from 11 million tons in 2008 and 8.2 million tons in 2007.