The rapid growth in China’s construction sector as well as the current liquidity and sentiment-driven appetite for Chinese paper are likely to be key themes during the road show for China National Building Material Co’s initial public offering that was launched this week. The state-owned enterprise, which makes a diverse range of building materials and is one of the leading cement manufacturers in the country, is aiming to raise up to HK$1.7 billion (US$220m) ahead of a Hong Kong listing on March 23.Morgan Stanley is coordinating the offering.
The company is offering 654 million H shares with the standard 90%/10% split between old and new shares. The deal is being marketed on an indicative price range of HK$2 to HK$2.60, which will value the company at 9.7 to 12.6 times projected 2006 earnings. This will pitch the company at a slight discount to Taiwan Cement, which is 25 per cent larger than CNBM in terms of overall cement manufacturing capacity. However, the Taiwan-listed competitor has a capacity of only 8Mta in mainland China, compared with CNBM’s 10.9Mta.
CNBM is also in the process of constructing two new cement production lines that will increase its annual clinker capacity to 13.4Mta by the end of this year and to 15.8Mta by the second quarter 2007. It is also boosting its cement grinding capacity to 13.8Mta by the second quarter this year. Parent company China National Building Material Group Corp will hold about 64 per cent of CNBM at the time of listing.
Taiwan Cement currently trades at a 2006 P/E ratio of about 13 times, while Hong Kong-listed Anhui Conch-Cement, which has a much greater manufacturing capacity of 50 million tons per annum, is quoted at 22 times this year’s earnings. “Given that scale is a great advantage within the cement industry, Anhui deserves to trade at a significant premium,” one observer argues, adding that Taiwan Cement would be a better comparison for the newcomer.
According to investors, Morgan Stanley initially tested the market at about 10-11 times 2006 earnings, but as it found no price sensitivity at that level the price range was increased slightly before launch. The final price range will be determined by the middle of this week. The shares on sale will account for 33 per cent of the issued share capital at the base size. There is also a 15 per cent greenshoe that could increase the total funds raised to HK$1.92bn (US$248m).
Analysts note that while CNBM is much smaller than Anhui Conch-Cement, the concentration of its plants in or near the Huaihai Economic Zone means it operates in an area which is less competitive and has less price volatility than the Yangtze River Delta area, where its bigger rival is located. The company is also more diversified with operations spanning lightweight building materials such as gypsum boards – which are being promoted by the mainland government as an energy-efficient construction material - acoustic ceiling panels and lightweight metal frames; glass-fibre and fiberglass-reinforced plastic products; and engineering services for the construction of float-glass and cement production lines.
“In contrast to most manufacturers of building materials listed in Hong Kong, which focuses mainly on one particular segment, CNBM’s core operations comprise several major segments and maintain leading positions in its respective segments. This makes it the overall leader in China’s building materials industry, in our opinion,” one analyst wrote in a pre-deal research report. Cement is the biggest value-creator within the company, however, and this business did very well in the fourth quarter last year. It is also said to be seeing another strong quarter right now, according to a source familiar with the company.
CNBM is expected to post a 67%-78% rise in net profit to between Rmb322 million and Rmb345 million in 2005, and this year should see the bottom line grow further to Rmb426 million, according to syndicate research. Total turnover is forecast to rise 64 per cent to about Rmb4.75 billion in 2005 from Rmb2.89 billion a year earlier. However, investors will be wary about talk of capacity oversupply and the potential for increased competition as the cement sector consolidates its more than 5000 cement producers into fewer, but stronger, players.
In the words of one analyst: “As the building materials industry has always been susceptible to chronic oversupply, we believe CNBM could be subject to sequential performance drags from the individual segments of its diversified portfolio of business operations.”