ôDue to the quality of the book, it could have been priced anywhere in the bottom half of the range. But with an eye to the market, they wanted to give it a buffer so that it goes well when it starts trading,ö says a source close to the deal.
The institutional tranche was three times covered. Most of the demand came from Asia, with the investors described as a good mix of long-only and hedge funds. The 10% retail portion was twice covered. Investors were said to have been attracted by the cement sector, but with most recent newcomers trading down, there was is no real urgency to participate in the IPO.
Shanshui is the second company from the Chinese province of Shandong to go for an IPO this month after Shandong Chenming Paper. The latter has proven to be one of the poorest performers recently with a 16% fall on its first day of trading on June 18. It is currently down 26% from its IPO price of HK$9.
The cement sector is surrounded by mostly good news as demand for the product remains solid. Despite this, sector leader Anhui Conch has underperformed the broader market û which has been largely flat û over the past couple of weeks, making ShanshuiÆs valuation seem less attractive on a relative basis. Since Shanshui started bookbuilding on June 16, Anhui Conch CementÆs share price has fallen by 11%. It is still trading at 20.5 times its projected earnings for 2008, however, and with Shanshui coming to market at about 13.5 times (on a post-shoe basis), it is valued at a discount of 34%.
Asia Cement China is currently trading at a 2008 price-to-earnings multiple of 17.1. When it debuted in May, it had the best first day trading for a Hong Kong IPO since Alibaba.com in November last year. Asia CementÆs first day gain of 37% was very much due to timing though û it priced just days before the Sichuan earthquake, which caused an instant boost for the demand in cement. From its closing peak on May 30, it has dropped 22%, however.
In terms of both sales and volume, Shanshui is ChinaÆs second largest cement maker. It covers the northeastern market with a 16% market share in Shandong and an 8% share of the Liaoning market. It expects its market share in both provinces to rise to 20%.
Growth will come from two main areas. As one of 12 Chinese cement producers that can benefit from government support when engaging in mergers and acquisitions, Shanshui is expected to spend up to Rmb2.5 billion ($320 million) to acquire smaller local companies. This will help increase its current annual capacity from 35 million tonnes to approximately 42 million tonnes. More capacity will be added by improving its current plants.
Shanshui sold 650.84 million primary shares, which represents 25% of the company. There is a 15% greenshoe, which if exercised, could increase the value of the deal to $269 million. Credit Suisse and Morgan Stanley arranged the deal. Listing is scheduled for July 4.
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