China Resources Cement seeks $825 million from HK listing

While the IPO candidates in Hong Kong are becoming more varied in terms of their business lines as the environment improves, China Resources Cement (CR Cement) is one of those companies that could have attracted attention even during the more difficult first half of the year. The largest cement and clinker producer in Southern China and the country's second largest producer of concrete, CR Cement has a strong position in one of the fastest-growing areas in China and is an obvious beneficiary of the government's $585 billion stimulus package which is heavily focused on the construction of infrastructure and affordable housing.

It is also owned by the same parent as Hong Kong-listed China Resources Enterprise, China Resources Land and China Resources Power, which means the group, and part of the management, is already familiar to investors.

According to a source, the strong market position and the strong and stable management, as well as higher earnings growth and wider margins, should warrant a premium to similarly sized China Shanshui Cement, which listed in Hong Kong in early July last year. Indeed, when CR Cement started the formal roadshow in Hong Kong yesterday, the price range positioned it at a noticeable premium to Shanshui. Except right at the bottom of the range, it also comes at a slightly richer valuation than China National Building Material, which counts cement as one of its major products.

Given the multitude of initial public offerings currently in the market and the reasonably large size of the CR Cement offering, one cannot help but wonder whether such an aggressive pricing is wise -- even if the company is better positioned than its peers.

CR Cement is aiming to raise between HK$5.24 billion and HK$6.39 billion ($676 million to $825 million) from the sale of 25.5% of its enlarged share capital. It is offering 1.638 billion new shares at a price between HK$3.20 and HK$3.90, which translates into a 2010 price-to-earnings multiple of 12.5 to 15.3 times, based on the average earnings forecasts among the bookrunners.

By comparison, as of yesterday's close, Shanshui Cement was quoted at 9.1 times and CNBM was at 12.8 times, while sector leader Anhui Conch Cement, which is significantly larger than the other three, was trading at 18.9 times.

However, CR Cement, is in the process of expanding. According to one syndicate research report, its annual clinker production capacity is expected to increase by 128% to 25 million tonnes by 2010 (versus 2008); its cement capacity is expected to increase by 108% to 34 million tonnes; and the concrete capacity is seen to grow by 56% to 16 million cubic metres. The company has production lines in the Guangdong, Guangxi and Fujian provinces.