Chinalco's engineering arm braves difficult market
China Aluminum International Engineering, the engineering and construction unit of state-owned Aluminum Corporation of China (Chinalco), is going where only the brave dare go these days - to the stock market.
The company joins other state-backed metals and energy companies in launching an initial public offering of shares in Hong Kong.
Analysts said that provided China Aluminum prices its shares at a reasonable level - plus promised help from cornerstone corporate investors that will take up about half the offer - the company should be able to pull off its US$184 million to US$221 million IPO.
China Aluminum is eager to list because it will pave the way to raise further capital through share issues, as well making it easier to issue bonds as a listed company, helping the firm reduce its reliance on bank loans.
About half the IPO proceeds will be used for new engineering and construction contracting projects, some 20 per cent to procure equipment and parts, 10 per cent for research and development, 10 per cent for new products and services development and the remaining 10 per cent for working capital.
Plans call for the company to offer 363.16 million new shares at between HK$3.93 and HK$4.73 each, according to the preliminary listing prospectus given to institutional investors on Tuesday. Based on calculations by the South China Morning Post, this represents 10.6 to 12.7 times its net profit per share of 37.21 HK cents last year.
Besides providing engineering design and construction contracting services to nonferrous metals miners and smelters, China Aluminum has over the years diversified into transportation, power, oil, petrochemicals, construction materials, environmental protection and public utility construction. It also makes equipment used in these industries.
Last year, the company derived 79.2 per cent of its total revenue from engineering and construction contracting, 12.8 per cent from engineering design and consultancy and 8 per cent from equipment manufacturing. It posted a net profit of 808.4 million yuan (HK$985.92 million), up 13.2 per cent from 2010. Revenue grew 8.5 per cent to 12.19 billion yuan.
There isn't a listed company with which to compare China Aluminum. But a look at Metallurgical Corp of China (MCC), which provides design, engineering and construction services to some of the nation's largest steel mills as well as nonferrous metal miners and smelters, gives some idea. MCC also engages in low-cost housing construction and has stakes in metals mining projects overseas. MCC is trading at 6.42 times last year's net profit per share.
MCC, a much bigger rival of China Aluminum, posted a net profit of 4.24 billion yuan on 229.72 billion yuan of revenue last year, of which 78.6 per cent was from engineering and construction and 6.2 per cent from equipment manufacturing.
Kenny Tang Sing-hing, general manager of AMTD Financial Planning, a Hong Kong advisory firm, also compares China Aluminum with mainland railway building companies. He said that unless China Aluminum has a rosier earnings outlook, the shares should be priced at less than 10 times last year's earnings, given that China Railway Group and China Railway Construction, which build most of the mainland's railways, are trading at eight times last year's earnings.
'While Beijing's recent move to speed up infrastructure construction will boost fixed-assets investment and increase demand for China Aluminum's services and equipment, it should not price its shares at too high a valuation,' Tang said.
According to Beijing-based nonferrous metals industry consultancy Antaike, growth of fixed-asset investment in the mainland's nonferrous metals industry slipped to 31.4 per cent last year from 33.5 per cent in 2010. The slowdown is more moderate compared with the entire nation's fixed-asset investments, which dropped to 11.8 per cent last year from 23.8 per cent in 2010.
While the oversupplied aluminium industry may not present exciting growth opportunities for smelter construction, Tang said Chinalco's diversification into nonferrous metals such as copper and rare earths would bring in additional business opportunities for its subsidiary China Aluminum.
Chinalco accounted for 30 per cent of the unit's revenue last year, down from 50 per cent in 2009. After the IPO, Chinalco is expected to hold an 85 per cent stake, while a further 7 per cent is expected to be held by mostly state-backed cornerstone corporate investors.
China Aluminum received 28.9 billion yuan of new orders last year and had 32.1 billion yuan of uncompleted orders at last year's end. About 85 per cent of its sales last year came from the mainland, with the rest mostly from Vietnam and India.
The company signed two contracts between 2005 and 2008 to design and build an aluminium smelting plant in Iran, but they were not implemented because some unspecified 'conditions' were not satisfied, China Aluminum said. Last month, it served written notice to its customers to terminate the contracts.
The company has agreed not to use any of the IPO proceeds, or proceeds from future share issues in Hong Kong, towards any project in countries sanctioned by the United States and other jurisdictions. The company also promised not to use any equity-related proceeds to pay for any damages sought by its Iran customers owing to the contracts' cancellation.
To increase the chances of a successful IPO, China Aluminum has secured commitments from six cornerstone investors, mostly state-backed, which together agreed to buy US$100 million of the shares, including Seventh Metallurgical Construction, Yunnan Tin (Hong Kong) Yuanxin and China Xidian Group. That's about half the targeted fund-raising amount.
China Aluminum plans to pay at least 20 per cent of its future distributable earnings as dividends, according to its IPO prospectus.
No of shares on offer: 363.16 million
Offer price: HK$3.93 - HK$4.73 per share
Latest date to lodge application: June 27
Date of determining offer price: June 28
Debut date: July 6
Cornerstone shareholders: Seventh Metallurgical Construction, Yunnan Tin (Hong Kong) Yuanxin, China Xidian Group, Beijing Jundao Technology Development, Yunnan Aluminium International, Jiangxi Transformer Science & Technology