Sinoma IPO allure untarnished by mainland austerity measures

Sinoma IPO allure untarnished by mainland austerity measures
Published: 05 December 2007

Despite the uncertainties posed by mainland austerity measures and a chilly response to some recent initial public offerings, the upcoming initial public offering for China National Materials (Sinoma) may still prove attractive to investors.

Sinoma, the mainland’s biggest cement company, plans to raise up to HK$4.19bn by issuing 931.71m shares at between HK$3.20 and HK$4.50 per share.

"Compared with other large-scale companies, such as Anhui Conch and China National Building Materials, Sinoma seems to have a more attractive valuation," said Hantec Investment International research director Michael Wong. "However, there is always a risk to an industry if there are any policy changes."

Worried about an overheated construction sector, Beijing announced in 2004 that it was tightening bank lending requirements in an effort to curb growth. The full effects of the policy shift began to be felt the next year.

That left Sinoma vulnerable because it affected some of its main lines of business - cement, cement equipment and engineering services, glass fibre and high-tech materials.

In its preliminary prospectus, the company did not disclose details on pricing and sales following the central government’s austerity measures. But Sinoma did reveal that its investment in cement fixed assets had decreased 4.1 per cent to 33.9bn yuan last year compared with 2005.

According to company figures, Sinoma’s underlying profit declined 46.75 per cent in 2005 to 99.08m yuan from 2004. However, in 2006 profit surged 184.5 per cent to 281.91m yuan. The company has forecast that its underlying profit at the end of this year will reach 422m yuan.

So far, Sinoma’s initial public offering has attracted six investors including China Construction Bank, China Life Insurance, China Communications Construction, Citigroup, the Government of Singapore Investment Corporation and Leslie Lee Alexander, owner of US basketball team the Houston Rockets.
The order book for institutional investors opened on Monday, and the retail investors’ book is due to open next Wednesday.

"The company should still be careful in setting its share price because recent market volatility has made investors hesitant to buy into new stocks," said Hong Kong Institute of Investors chairman Ricky Tam. Still, he added, "institutional investors are interested in materials companies" for their traditionally high returns.

According to the China Cement Association and the China Building Materials Construction Society, Sinoma has a 22 per cent share of the global market for cement and 90 per cent of the domestic market.
That bodes well for Sinoma.

"The robust economic growth on the mainland has brought surging demand for cement because of investments in infrastructure projects," said Cash Asset Management associate director Patrick Yiu.
Figures from China Cement Net, the country’s professional e-market place for cement enterprises, indicated that the mainland has been growing at an average annual rate of 11 per cent due to ongoing urbanisation and infrastructure investments.

Flush with nearly HK$4.2 bn, the company will spend 75 per cent to enhance production facilities in its four main businesses. Another 25 per cent will be used to repay short-term loans and as working capital.
For the glass segment, Sinoma plans to construct a 50,000tpa alkali-free direct-melt glass-fibre production line and a 12,000tpa multi-axial glass-fibre fabric production line.

According to figures from the China Fibreglass Industry Association, the company produced 203,684 tonnes of glass fibre last year, representing 17.5 per cent of total glass fibre output in the mainland.

The association estimated that production output for glass fibre on the mainland will reach 1.6Mt in 2010, representing a compound annual growth rate of 7.5 per cent between 2006 and 2010.

Sinoma also plans to build 5,000-tonne- and 4,500-tonne-per-day new dry process clinker production lines. The company’s cement operations are mainly located in Xinjiang Autonomous Region and Guangdong Province.

As of July, the company operated 17 new dry process cement production lines with an annual production capacity of 17Mt of cement.

Sinoma generated 46.6 per cent of its turnover in the cement equipment and engineering services segment from overseas business last year - 65.2 per cent in the first six months of this year.
The primary overseas markets of the company are Asia, the Middle East and Africa.