CPMC IPO goes ahead as property deals flounder

CPMC Holdings yesterday started a roadshow for an IPO that could raise as much as HK$1.07 billion ($139.1 million). The metal-packaging company launched the deal after two straight days of significant declines in the Hang Seng Index (HSI) and on the same day that Excellence Real Estate Group pulled its $1 billion IPO.

CPMC is offering 200 million new shares at a price between HK$3.85 and HK$5.39 per share. A 15% greenshoe could introduce another 30 million shares into the deal and increase the maximum possible deal size to $160 million.

The company is China's largest metal-packaging company. Its main product is beverage cans, which account for 55% of its sales revenue. It also makes aerosol cans, food cans, metal caps and steel barrels. It supplies companies in the food and beverage, healthcare and household chemical industries. Its largest customer by far is JDB, the company that makes the canned herbal tea drink Wang Laoji. Cans for this drink alone accounted for 50% of CPMC's sales in the first half of 2009.

In a highly fragmented metal-packaging industry made up of 1,400 players, CPMC comes out top in terms of turnover, with a 6.4% share of the Rmb51 billion ($7.5 billion) business. The company's turnover grew at a compound annual growth rate (CAGR) of 42% between 2006 and 2008, and although it took a hit from the financial crisis, with turnover dropping by 5% in the first half of the year, net profit still increased by 14% due to lower material costs.

The controlling shareholder of CPMC is the Cofco Group, which has one of the largest food businesses in China. According to one syndicate research report, this benefits CPMC since it allows it to leverage "on the parent's well-established brand name and profile to develop business opportunities and expand its sales network".

CPMC has already secured three cornerstone investors -- China Resources (Holdings) Company, JDB and CCB International Asset Management -- which will subscribe to 15 million, 10 million and 8 million shares respectively. This will see them take a combined 16.5% of the deal.  

CPMC's production lines are operating at full steam and much of the IPO proceeds, 43% to be precise, will go towards the construction of new production facilities. The company's target is to increase its annual production to 800 million beverage cans, 50 million food cans and 12 million plastic containers by 2011. The rest of the money will be spent on upgrading existing facilities in Chengdu and Panyu. Repaying a bank loan will soak up 6.3% of the cash.

The price range values CPMC at between 13.3 and 18.6 times its projected earnings in 2010. Most other companies in the packaging universe are located in the US. In the cans business there is Ball Corporation, which trades at around 12 times next year's earnings -- a valuation that is pretty much in line with the overall sector. When looking for Hong Kong-listed comparatives, investors are turning to downstream food and beverage companies, such as Tingyi Holdings and Want Want China, which are trading at 15 times and 18 times respectively.

The IPO is being arranged by BOC International and China International Capital Corp. The roadshow will continue until November 5, with the pricing expected on the following day. The shares will start trading on November 16.

The timing of the CPMC IPO might seem a little strange considering what's going on in the rest of the market, including the decision by Shenzhen-based property developer Excellence, to postpone its IPO. Excellence had already completed its bookbuilding and was due to announce the final price of the deal yesterday.

In a stock exchange filing the company said that in view of "the current market conditions for initial public offerings and with the investors' best interests in mind" it had decided "not to proceed with the global offering under the original timetable". It added that it "will continue to review the situation and a further announcement will be made once a decision to relaunch is reached". The offering was being arranged by ICBC International, Morgan Stanley and UBS.

There was no information on whether the deal was fully covered or not, but market watchers said yesterday that it appears the four property IPOs in the market over the past week may have crowded each other out. Investors are also getting a bit concerned about the reason why these developers are rushing to market now.

However, Excellence's management is said to have been focused on a strong aftermarket performance and, with other IPOs continuing to struggle below issue price, it may have thought it better to withdraw the deal. A source noted that the company has no immediate need for additional funding, which will have made the decision to pull the deal a bit easier. Also, all the shares on offer were primary, meaning there were no selling shareholders putting pressure on the management to push on with the deal.

And Excellence is not the only Hong Kong listing candidate to face problems. Mingfa Group (International), a property developer with projects in Fujian and Jiangsu, was supposed to have priced its IPO yesterday. Instead, the company was still debating last night whether or not to proceed with the deal. An announcement is expected to be made today. On Tuesday another Fujian-based property developer, Yuzhou Properties, priced its IPO at the bottom of the indicative range for a total deal size of $209 million.