Chinese military tailor seeks $469 million from Shanghai IPO

As Western economies urge China to increase the transparency of its military activities, Beijing is considering bringing one of its military goods suppliers to market. However, investors hoping to gain some insight into the state's arsenal of military hardware will be disappointed as Jihua Group is a supplier -- albeit it a major one -- of military uniforms and boots.

The company plans to raise up to Rmb3.2 billion ($469 million) from an initial public offering (IPO) in Shanghai, it said in an announcement on the web site of China Securities Regulatory Commission (CSRC) yesterday. The regulator said in a separate statement that it will review the application on April 28.

Jihua has a large nationwide network of factories making army uniforms, boots, tents and various other military wear, according to a preliminary IPO prospectus. With a market share of 75% in military goods production in China and one big customer in the form of the People's Liberation Army, Jihua evidently enjoys a unique market position in its trade. Especially now that China is in the midst of an ambitious bid to modernise its military by the middle of this century. The PLA currently consists of roughly 2.5 million recruits, divided between its land, air and navy forces.

The company plans to use Rmb1.7 billion of the IPO proceeds for research and development into uniform design and materials, while Rmb430 million will be used to upgrade its boot production.

The company is looking to offer 1.16 billion A-shares. The fact that it has chosen to sell shares in Shanghai instead of Hong Kong clearly shows that the company has no intention of attracting international investors, but it has appointed UBS Securities as the sole bookrunner.

Whether Jihua will get a good response from domestic investors remains to be seen. China's stock markets suffered their sharpest drop in almost eight months last week after the government took some of its toughest steps yet to crack down on property speculation, and the decline continues this week. The Shanghai Composite Index fell 14.03 points to 2,969.51 yesterday, led by property and financial stocks, and is down 8.4% so far this year.

The State Council told banks last week to stop loans for third-home purchases in regions with excessive property price gains and to reject mortgages to home-buyers who cannot provide proof of local residence. Local governments have also been given the discretion to limit the number of homes that can be bought within a certain period.

The government is also expected to announce another round of measures to cool the real estate market. Chinese media reported yesterday that the central government plans to launch an annual property tax in Beijing, Shanghai, Shenzhen and Chongqing in the first half of this year.

Observers say the tightening measures could cause monthly transaction volumes to fall by more than 50% in the coming months and a further drop in mainland stocks is also foreseeable.

"There is always a price to be paid to stabilise a market," Fan Gang, a former member of the monetary advisory committee for China's central bank, said at Macquarie Securities' China and Hong Kong Conference yesterday. "It's better to stop the bubble before it becomes bigger and bursts."

China's last domestic IPO of size was Chongqing Water's $511 million share sale in March. The stock jumped 74% in its Shanghai debut after the company opted to keep the IPO valuation low amid lukewarm interest in new offerings.

The Chongqing-based company sold 500 million new A-shares at Rmb6.98 apiece. The final price marked the top end of an offering range that started at Rmb6.48 and translated into a 2009 price-to-earnings ratio of 34.9 times. The valuation was below analysts' expectations of around 45 to 50 times earnings.

Huatai Securities' $2.3 billion transaction in early February remains the largest A-share IPO so far this year.