The world's largest IPO of the year-to-date was priced towards the top of its price range on Saturday by joint leads BOCI and Credit Suisse First Boston. International books for the $436 million deal closed twelve times covered, with retail books likely to announced as more than 15 times covered, since the first clawback is to be triggered.
A total of 1.554 billion shares were sold at HK$2.19 compared to an indicative price range of HK$1.67 to HK$2.29. Representing a p/e multiple of 13 times 2003 forecast earnings, this means the deal has not only come at, or in line with all its major Asian comparables, but also against the global logistics sector as well. Container leasing company and fellow H-share Cosco Pacific, for example, was trading at 11.6 times 2003 forecast earnings on Friday, while Singaporean logistics company Sembcorp was trading at 13.4 times. Where international comparables are concerned, Kuehne & Nagel, the world's largest sea freight company, was trading at 11 times and European logistics company Exel at 15 times.
Pricing at these levels is an impressive feat for a company, which general industries bankers have always said would need to be sold rather than would sell itself. Success has been attributed to a combination of the right timing and a good structure, which left most of the dead assets such as warehouses with the parent.
The fact that the deal is the world's largest IPO to date, does not say very much about the state of the global equity markets. What it does show is that Sinotrans has so far been lucky and managed to price, though not yet trade, ahead of a war in Iraq.
It also underlines investors continuing preference for all things China as long as they are not P chips. Some bankers believe that money previously looking for a home in China's burgeoning private sector has been switched over to state-owned companies with a steady growth story and more responsible management. As UBS Warburg pointed in a recent research report, 13 of the major 20 H-shares recorded double-digit gains during 2002, while the bank's P Chip Index fell 35% over the same period.
With P chips such as BYD and Euro-Asia suffering any number of credibility issues, bankers say investors have been looking for earnings consistency above all else. In Sinotrans case, the company has been sold as a combination play, appealing to investors looking for strong earnings growth and some yield. Crucially, the company also managed to line up a number of global players as strategic investors, with four global logistics companies taking roughly 26% of the institutional book pre-shoe. The deal itself represents 38.5% of the Sinotrans issued share capital pre-shoe and syndicate members number ICEA, JPMorgan and Salomon Smith Barney as co-leads, with Cazenove, CLSA, ING and Nomura as co-managers.
Institutional and retail books had the usual roughly 90%/10% split and the four strategic investors all came out of the institutional book, leaving only about $288 million for institutional subscription. DHL took $57 million, UPS $35 million, Exel $10 million and Japan's Nissin $1 million.
About 350 institutional investors participated with 10% orders alone enough to cover the book. By geography, bankers say the book split 47% Asia, 33% Europe and 20% US. Tier 1 and super tier 1 accounts represented just over half the book.
As one specialist concludes, "This company is heavily geared to WTO. Logistics companies generally grow at a leveraged rate to GDP and China's GDP is growing faster than most." Syndicate research has averaged EBITDA growth of 20% over the next three years. From 1999 to 2001, the company also reported compound annual revenue growth of 19% and EBITDA growth of 33%.
Added to this, company management have also said that they will pay up to 50% of net income in dividends, equating to a dividend yield of roughly 3%.
The company's supporters argue that the nature of Sinotrans business makes it fairly immune to competition. Most international competitors have so far chosen to work with it rather than against it and as one banker points out, "This is not so much a story of market share gain as a market growth."
The company's lead managers were also sensible enough not to burden the company with many dead or low yielding assets. And as CSFB wrote in a recent global logistics report, "Since forwarders do not own cargo, capital requirements are low and cash generation high, leading to returns on invested capital in excess of 20%, considerably higher than a company's cost of capital."
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, $2.7 billion in assets, 52 subsidiaries, 508 independent management companies and 238 joint ventures.
The list co, by contrast, has just 15,000 employees and covers 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 Rmb 4.5 billion ($544 million).
