China's national transportation and logistics company, Sinotrans, is preparing to become the first major listing on the HKSE in 2003, with plans to raise up to $500 million. The company will sell 38.5% of its enlarged share capital through an offering led by Bank of China International and Credit Suisse First Boston.
However, the amount being sold to retail and international investors will probably amount to about $350 million, as 10% of the company's equity is likely to be taken up by strategic investors including a number of Sinotrans' many joint venture partners such as international express delivery group DHL.
Pre-marketing is currently scheduled to start on January 6, with roadshows set to begin about a week before Chinese New Year and pricing shortly after the end of the January break. Co-leads are CLSA, Cazenove, ING, JPMorgan and Salomon Smith Barney.
Founded in 1950, Sinotrans is an arm of the Ministry of Foreign Trade and Economic Co-operation (Moftec) and is officially known as China National Foreign Trade Transportation group. The parent company is a huge and geographically sprawling giant with about 67,000 employees, $2.66 billion in assets, 52 subsidiaries, 508 independent management companies and 238 joint ventures.
Its businesses span the whole gamut of transportation and its associated logistics including shipping, freight forwarding (it owns over a dozen port terminals), rail transportation, road transportation (it has its own trucking company) and warehousing.
General industries experts have traditionally been fairly unenthusiastic about the company, arguing that service standards vary wildly from region to region and that it has a huge and under utilized asset base. A number point out, for example, that many of the company's warehouses have large land banks that cannot be sufficiently developed because of their unappealing locations.
Transport logistics in China is also a fairly inefficient industry accounting for about 12.5% of the cost of goods compared to only 2.5% in more developed markets. Some analysts calculate that the logistics of getting goods from 'A to B' eats up to 20% of annual GDP and have been known to joke that it is still quicker to transport goods by bicycle through the country's congested city traffic.
However, the listco has been deliberately kept asset-light and has been carefully stripped down to just a few key physical assets such as strategic warehouses and only about 15,000 employees. It will house three main businesses: freight forwarding, shipping agency services and express services - the latter largely through Sinotrans' shareholding in Shanghai-listed SinoAir, which contains three express delivery JVs.
Revenue for the first half of the year totaled Rmb6 billion ($725.5 million), of which freight forwarding accounted for Rmb4.5 billion ($544 million), express services Rmb520 million ($63 million) and marine transportation Rmb740 million ($89.5 million). First half profit amounted to Rmb293 million ($35 million).
Seven mainly coastal provinces and municipalities have also been cherry picked and comprise: Shanghai; Jiangsu, Zhejiang; Shandong, Tianjin, Guangdong, Fujian and Liaoning. Industry specialists also comment that while there is potential for future asset injections, the restructuring work needed in many of the inland provinces means that only a couple are likely to be included over the short to medium term.
The company is likely to be pitched as a growth play rather than a restructuring play and its main appeal lies in its unique spread across the whole logistics industry. In most other countries, by contrast, transport logistics is operated by specialist companies along each point of the supply chain rather than as an integrated network.
This means that in valuation terms Sinotrans will be a blended play taking into account a number of global comparables such as shipping agents like Maersk and third party logistics providers like Kuehne & Nagel.
Greater multinational interest in China as a result of WTO and a growing trend for domestic companies to outsource logistics will be main earnings growth driver. From 1999 to 2001, Sinotrans is said to have reporting compound annual revenue growth of 19% and EBITDA growth of 33%.
Industry experts believe that consistently high EBITDA growth and the strategic support of a number of international competitors will be the key ingredients of a successful IPO. As an added sweetener, the company has also indicated that it will pay out up to 50% of net income in dividends.
One challenge the company will need to address during roadshows, however, is the traditional Chinese bugbear that local and national protectionism continues to hamper the activities of foreign operators. Where express delivery is concerned, the big four foreign express delivery companies have spent the past year locked in dispute with China Post, their main competitor and the industry's regulator.
In a bid to build up its own express delivery service, China Post has issued new regulations attempting to make foreign operators charge more for their services and ban them from delivering either personal or government-related packages.
Sinotrans intends to use 30% of proceeds from the IPO to develop its logistics distribution network, with 20% earmarked for capex for its freight forwarding activities and the remainder on IT and general working capital.
