“The British don’t understand China,” Zhang Jimin, chairman and chief executive officer at West China Cement, has told reporters in Hong Kong. “Our shares have been severely undervalued,” he said.
The Shaanxi-based cement producer plans to delist from London’s Alternative Investment Market (AIM) blaming British investors’ ignorance on the value of the stock. Alternatively, it is looking to raise up to HK$1.39 billion ($179 million) through an initial public offering in Hong Kong where Chinese companies are popular bets for investors.
The company plans to delist from the London’s junior trading board on August 23 and start trading in Hong Kong the same day.
It is going to be the second Chinese company to delist from AIM within three months. In June, China Biodiesel International, a Chinese renewable energy group, dropped its listing through a tender offer in which the company bought back the outstanding shares.
The company, which develops biodiesel, described its share performance as “disappointing” and “a source of frustration” and said the development of the business and growth potential had not been adequately reflected in the value attributed by the market to the ordinary shares.
Some London-based economists agree that investors in the UK don't appreciate how fast-growing China's economy actually is. “That is true, many people in Britain don’t understand the scale and pace of China’s growth, they haven’t seen much of the country,” said Gerard Lyons, chief economist at Standard Chartered Bank.
Earlier this year, China Eastsea Business Software delisted from AIM citing similar reasons that the stock was valued poorly even when the company's profit growth was exceeding market expectations.
Based on 2010 earnings, London-listed shares in West China Cement are trading at a price-to-earnings ratio of 6.7 times. By contrast, London-traded shares of CRH, the world’s second-largest maker and distributor of building materials, are trading at a P/E of 16.4 times, according to data from Bloomberg.
Hong Kong-listed Chinese cement producers are also trading at higher valuations. Anhui Conch Cement is trading at around 23 times and China Shanshui Cement 10.9 times.
In its Hong Kong IPO, West China Cement is selling 823 million primary shares, or 20% of its enlarged share capital, at between HK$1.21 and HK$1.69 a share, which will allow the company to raise between HK$995.8 million and HK$1.39 billion. The share sale comes with a 15% greenshoe option so the deal size could extend to between HK$1.14 billion and HK$1.59 billion if the option is fully exercised.
The offering price range was about a 1.5% to 29.5% discount to the company's closing price on the AIM on August 6.
The IPO price will be fixed on August 13 and trading is scheduled for August 23. Deutsche Bank and ICBC International are handling the IPO.
Proceeds raised from the sale will be used for capacity expansion, including the construction of new projects and for the repayment of loans.
The cement company estimates its net profit for the first half will be at least Rmb307 million. In the first four months of this year, revenue soared 93% to Rmb675.3 million while net profit rose 69.9% to Rmb154.3 million ($22.7 million), it said in an IPO prospectus.
Unlike British investors, Chinese brokerages see great potential in the cement group.
West China Cement has clear earnings potential due to rapid fixed asset investment (FAI) growth. Backed by the mainland government's "Western Development Plan", Shaanxi enjoys stronger GDP and FAI growth than the national average, Shenyin & Wanguo Securities said in a report.
“We believe the company's sales volumes will increase significantly, from 5.1 million tonnes in 2009 to 16.6 million in 2012 and [we] expect revenue to grow at 46%,” it said in the same report.
