On a day when all eyes were on the tightening credit conditions in China and the potential for more interest-rate hikes in the near-term, Yuanda China Holdings stepped forward and kicked off the institutional roadshow for an initial public offering of up to HK$4.17 billion ($537 million).
As a developer of curtain walls, which refers to building facades that are non-load bearing and often made of glass, aluminium, granite or other cladding materials, the company is heavily exposed to the construction and property sectors, which tend to suffer when rates edge higher. However, Yuanda focuses primarily on commercial buildings and public facilities, which are much less affected by interest-rate cycles and more correlated to GDP growth. They are also not a target of Beijing’s clampdown on rising property prices.
In addition to that, Yuanda generates just over one-third of its revenues from the international market. As of the end of 2009, it was the second-largest developer of curtain walls in the world in terms of sales, behind Italy’s Permasteelisa, and of the top five global players in this industry, it is the one with the greatest exposure to China and the Middle East, which are two of the most rapidly growing markets for these products.
In the past three years, Yuanda has completed 513 curtain wall projects around the world, including well-recognised landmarks such as the Bird’s Nest stadium and the Water Cube swimming centre that were both built for the Beijing Olympics; the Theme Pavilion at the Shanghai World Expo site; the Cocoon Tower in Tokyo; and the Maydan Racecourse and the Executive Towers at Business Bay, which are both located in Dubai.
Curtain wall applications are growing in popularity thanks to their shorter construction time, low cost, light weight, simplification of temporary construction and strong performance in terms of filtering the impact from the elements, such as sun, rain and wind. Since the mid-1990s they have also been able to improve the energy efficiency of buildings. According to a report by global research company Synovate, the global curtain wall market is expected to expand at a compound annual growth rate (CAGR) of about 9.5% between 2009 and 2012, reaching $24.5 billion at the end of that period.
The sales of curtain walls in China will grow at double that rate -- more than 20% a year -- supported by the rapid urbanisation and favourable policies towards infrastructure and construction development, while sales growth in the United Arab Emirates will reach 17%-18% in the next two years, Synovate projects.
The private-sector company is offering 1.5 billion new shares, or 25% of its enlarged share capital, at a price ranging from HK$1.92 to HK$2.78. This will allow it to raise between $370 million and $537 million, which could be increased to as much as $617 million if the 15% greenshoe is exercised in full.
The offering has the early support of one cornerstone investor — Hong Kong-based fund management firm Atlantis, which has committed to invest $30 million. And bankers say the response on the first day of bookbuilding yesterday was also positive with investors being particularly keen on the fact that the company isn’t exposed to the residential property sector.
With few direct comparables, potential buyers face a challenge in terms of how to value the company, however. None of the other top five curtain wall players is listed and the companies that are listed are either not focused solely on curtain-wall solutions, or are significantly smaller. One example of the latter is Far East Global Group, which listed in Hong Kong in March last year and is only about a quarter of the size of Yuanda in terms of market capitalisation.
Syndicate analysts say Yuanda needs to trade at a premium to building materials and construction companies as it is providing value-added services such as customised designs and is also offering one-stop solutions for customers. Based on the joint bookrunner consensus, the price range translates into a 2011 price-to-earnings multiple of 9.4 to 13.6 times, pre-shoe. This compares with high single-digit multiples for most construction companies.
Looking at a wider universe of Hong Kong-listed construction companies and contractors, including the likes of Cheung Kong Infrastructure, Xinyi Glass Holdings and China State Construction International Holdings, the average P/E ratio increases to 11.2 times, according to one syndicate research report.
Far East Global Group, which raised $55 million from its IPO, struggled after the debut and fell 48% from the IPO price in the first three months before starting to edge higher again. It is currently trading 8.5% below the IPO price at a 2011 P/E multiple of 8.1 times.
While Beijing’s efforts to prevent a residential property bubble shouldn’t impact Yuanda, the company is definitely affected by rising commodity prices, especially aluminium and steel. According to the same syndicate research report, raw materials account for more than 50% of Yuanda’s total production costs. It is also exposed to currency risks with regard to its overseas projects and since it procures almost all of its raw materials from Chinese suppliers and uses Chinese contract workers, who are paid in renminbi, for a major part of the installations of the curtain walls, an appreciation of the renminbi could lead to a squeeze in margins.
The deal also faces the challenge of going out during Easter, when a lot of markets are closed. The retail portion of the offering, which accounts for 10% of the total, will open tomorrow and will run until April 27 to cover the usual three-and-a-half days. The institutional bookbuilding will close on April 28 and the final price will be determined after the end of New York trading that day.
The first day of trading is scheduled for May 6.
Yuanda has four manufacturing plants in Shenyang, Shanghai, Chengdu and Foshan where it makes the curtain walls that are then transported to the various construction projects around the world and attached to the buildings. It will use about 40% of the IPO proceeds to expand its production capacity of glass, aluminium alloy doors and windows, aluminium extrusion and complete curtain walls. Another 30% will go towards the repayment of existing debt, while the remainder will be split between research and development, the expansion of its sales and marketing network, and working capital.
At the end of 2009, Yuanda had a global market share of 5.7% in terms of sales, slightly behind Permasteelisa’s 6.1%. However, 61% of Yuanda’s revenues are generated out of China and another 14% from the Middle East, while its Italian competitor gets only 13% of its revenues from these two fast-growing markets. Permasteelisa’s main revenue earner (50% of the total) is Europe, which has been hard-hit by the economic turmoil in the past few years. This suggests the gap between the two will shrink over the next few years. Yuanda is the leading curtain wall developer in China with a market share of 20.8%.
The IPO is arranged by BOC International, Deutsche Bank, J.P. Morgan and Standard Chartered.
