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SCMP Reporter

Guangzhou Investment, a listed unit of the municipal government, plans to raise at least US$200 million by selling shares in its paper business in an initial public offering next year in Hong Kong, people familiar with the situation said.

It had hired BOC International and BNP Paribas to arrange the sale, the sources said. Both banks declined to comment.

Guangzhou Investment  said in its annual earnings report  in April that it was studying the spin-off of its newsprint operation to focus on its property and infrastructure business.

'The company's shares trade at a 40 per cent discount to [net asset value] so if they can spin off their paper assets, they can realise value and narrow the discount,' Sun Hung Kai analyst Stone Shi said.

Guangzhou Investment's shares fell 2.04 per cent yesterday to close at HK$1.44,  shaving this year's gain to 80 per cent.

As the company's paper assets are valued at HK$1.6 billion, the size of the offer would imply a valuation of about 12 times next year's earnings, according to Mr Shi.

That would be slightly lower than the 13.6 times cardboard-maker Nine Dragons Paper (Holdings) was valued at when it raised HK$3.4 billion in a share sale in March.  Nine Dragons shares have risen 48 per cent to close yesterday at HK$6.52 and trade at 22 times forecast  earnings next year.

Lee & Man Paper Manufacturing, which also makes cardboard, trades at 15 times forecast  earnings this year.

Guangzhou Investment plans to expand annual production capacity to 450,000 tonnes from the current 275,000 tonnes, while larger Nine Dragons plans to increase its annual production capacity to 5.4 million tonnes from 3.3 million tonnes by 2008.

The rise in capacity of mainland paper makers threatened a collapse of margins as soon as next year, analysts said.

Guangzhou Investment invests in mainland properties, makes newsprint and cardboard and operates toll roads. Last year, it raised US$230 million by spinning off property assets in a real estate investment trust in Hong Kong

Turnover dropped 15 per cent to HK$4 billion last year. The firm's paper business brought in HK$1.2 billion while the property unit contributed HK$2.3 billion.



Guangzhou Investment mulls spin-off plan