Based in the city of Chongqing in Sichuan province, the company is one of western ChinaÆs largest industrial conglomerates in terms of revenues. It designs, manufactures and sells machinery that fall into four categories: components for commercial vehicles; equipment for power generation; computer numerical control machine tools; and general machinery. Its strategy for growth is to branch into machinery products that have traditionally been imported into China.
The company has a market leading position in the production of diesel engines through a joint venture with US manufacturer Cummins. It also has other international partnerships û transformers with ABB Group and clutches with Exedy Group.
Chongqing Machinery will be offering 27% of its share capital in the form of 1.004 billion new shares. Pricing has yet to be determined, but sources say it is likely to come to market at a price-to-earnings multiple around 11 to 14 times, based on 2008 numbers. This would be a discount to its most obvious comparable, Shanghai Electric, which currently trades at a 2008 P/E ratio of 17 times, according to Bloomberg.
However, the listing candidate will probably come at a premium to Shanghai Prime, another machinery company that makes precision parts and components. This is due to Chongqing MachineryÆs diversified product portfolio and the high specifications of its equipment, says a source.
Chongqing MachineryÆs track record over the past few years has been positive û in 2007 its turnover was Rmb5.4 billion ($692.3 billion), after having recorded year-on-year growth of 39% in 2006 and 28% in 2007. And as a company that has been in existence since the 1950s, it has a well-entrenched distribution network, argues one source.
A lot is being made of the companyÆs location. Along with Beijing, Shanghai and Tianjin, Chongqing is one of ChinaÆs four municipalities, cities with a similar status to a province, reporting directly to the central government.
ôAs a state-owned enterprise, it has the full support of the Chongqing Government. Firms in Shanghai, such as Shanghai Electric and Shanghai Prime donÆt get so much,ö says a source.
Chongqing is a city that has a large pool of labour, and it is thought to be benefiting from the ôGo-Westö policy û a plan launched by the Chinese government in 1999 to bring economic development in western China in line with the more affluent coastal areas. There are various incentives, such as tax-breaks, government grants, and cheap land-deals, to encourage investment in the region. Between 2000 and 2004, the government spent Rmb850 billion ($108.9 billion) to improve infrastructure in the region. It is thought that this investment will help local companies.
Whether or not the government can keep up the pace of regional development is seen as a potential risk by one syndicate research report. It says: ôAny reversal of the policy or slow implementation could affect progress of the economy, which in turn could adversely affect Chongqing MachineryÆs operations.ö
For a company with a product catalogue that is heavily dependent on steel and copper, the price of commodities is also going to be an issue for the company. For example, between 2005 and 2007, the average cost of steel used in production has gone up from Rmb5,765 per tonne to Rmb7,481 per tonne.
ôThe prices of steel and copper have skyrocketed over the last few years and this has eaten into the companyÆs margins,ö says the source. That itself is motivation for the company to increase its production capacity, he adds. Another source points out that for investors who predict that commodity prices are not set to rise much in 2009, Chongqing Machinery's CAGR for the next few years, expected to be the ôin the mid-20sö, makes the company an attractive prospect.
Credit Suisse is acting as the sole bookrunner for the deal. The institutional roadshow is expected to start in the week of May 26, with the final price scheduled to be determined on June 6. The trading debut is set for June 13.
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