QunxingÆs main product is decorative base paper and according to China Paper Association, it ranked the largest manufacturer of this type of paper in China in terms of actual annual production capacity in both 2005 and 2006. Decorative base paper is an intermediate product commonly used as the decorative layer to furnish the surface of laminated board, which has wide applications in interior decoration of buildings, furniture, wooden floorboards and household wares, to mention but a few.
Since July 2006, the Shandong province-based company also makes printing paper that is used mainly for printing or photocopying. According to the preliminary prospectus, 87.7% of the companyÆs turnover last year came from decorative base paper, while the remaining 12.3% was generated by the printing paper business. At present only one of the companyÆs six production lines is used to produce printing paper.
ôAs the Chinese property market booms, you can expect there will be an increasing number of new homeowners resulting in great demand for decorative paper,ö says a source close to the deal. ôQunxing is also one of the few Chinese domestic paper manufacturers that has the technology to produce high-quality decorative base paper products.ö
Qunxing is offering 300 million shares, or 30% of its enlarged share capital, at a price between HK$4.10 and HK$5.35 per share. Of the total, 16.7% are existing shares sold by Boom Instant, a company jointly held by the Zhu family.
Zhu Yu Guo and his son Zhu Mo Qun are founders and executive directors of the company. The Zhu family will still hold 70% of Qunxing after the IPO.
The deal has a normal structure with 10% of the shares earmarked for retail investors and the remaining 90% going towards the institutional tranche. A full clawback, which is triggered when the retail portion is more than 100 times subscribed, will increase the retail portion to 50% of the deal. A 15% greenshoe could further boost the deal size to as much as $237.1 million. ICEA is the sole bookrunner.
ôIt is an attractive investment as its profit is expected to double this year,ö remarks an analyst after attending the investor luncheon.
The manufacturer projects its net profit will reach Rmb210 million ($26.7 million) by the end of this year, equivalent to a 1.2 times increase year-on-year. Its bottom line has grown at a compound annual growth rate of 45.4% in the past three years, to reach Rmb93.9 million in 2006, from Rmb44.4 million in 2004.
ôThe company is different from the upstream players already listed in the market as it positions itself as a decorative paper manufacturer,ö says one investor. ôI think its attractiveness mainly comes from the possibility of being a beneficiary of increasing living standards and wealth of the Chinese population, who are going to spend more on refurbishment and nice furniture. Plus, the price is reasonable.ö
At the indicative price range, the company is valued at a 2007 price-to-earnings ratio of 19 to 24.7 times. Hong Kong-listed Chinese upstream papermakers Nine Dragons Paper (Holdings) and Lee & Man Paper Manufacturing do give investors some ideas of how papermaking stocks trade, although Qunxing has no direct comparables that are listed.
Nine Dragons, which makes containerboard products and has a fiscal year ending in June, currently trades at 48.4 times its fiscal 2007 earnings and 33.3 times its estimated fiscal 2008 earnings, according to Bloomberg data. Lee & Man, whose fiscal year ends in March, trades at 26.7 times its projected 2008 earnings.
Lee & Man, which makes cardboard boxes, was the first of the two to list in September 2003 and has risen 700% since then to MondayÆs close of HK$33.40. Nine Dragons went public in March 2006 and is up 622% since then. It closed yesterday at HK$24.55.
QunxingÆs IPO already has the support of three cornerstone investors, who will take up 32% of the total offering through the acquisition of 32 million shares each. The investors are Hong Kong-listed Cheung Kong (Holdings); Chow Tai Fook, the private investment vehicle of New World Development Chairman Cheng Yu-Tung; and Kerry Holdings, a member of the Malaysian Kuok Group that is controlled by tycoon Robert Kuok Hock Nien. They will each have a 3.2% stake in Qunxing at the time of the listing, before any exercise of the greenshoe, and have agreed to a six month lockup.
Both the investor and the analyst worry that the price of wood pulp, which is one of the key raw materials used in paper manufacturing, may undermine the companyÆs profit margin as Qunxing has no plans to expand upstream. According to the preliminary prospectus, the manufacturer paid Rmb310.5 million for wood pulp in 2006, accounting for 40.5% of its total cost of sales. The company estimates that every 1% increase in the total purchase cost of wood pulp would have meant a reduction of Rmb2.1 million to its profit after tax in 2006.
The China Paper Association estimates that the demand for wood pulp will far exceed the domestic supply in the next five years, which suggests users will have to rely on imported wood pulp that is more expensive. This could have a negative impact on the companyÆs profit margins. Imported wood pulp represented 40.8% of the countryÆs consumption in 2005.
Qunxing will mainly use the proceeds to expand its production capacity and upgrade its current production lines. The company already has a seventh production line under construction, which will add another 30,000 tonnes of annual capacity to its current 170,000 tonne capacity when it begins commercial production in early 2008. It is also planning to add another four production lines with an aggregate designed annual capacity of 120,000 tonnes, bringing its total number of lines to 11. The total cost of these four additional lines will be approximately Rmb720 million and they are expected to start operations during 2009.
Part of the proceeds will also go towards research and development, marketing and the development of overseas markets.
The final price will be determined on September 21 and the trading debut is scheduled for October 2.
¬ Haymarket Media Limited. All rights reserved.
