Sinotruk shares set at costly PEs

PUBLISHED : Tuesday, 13 November, 2007, 12:00am
UPDATED : Tuesday, 13 November, 2007, 12:00am

Sinotruk (Hong Kong), a mainland red-chip firm seeking to raise up to US$1.15 billion in Hong Kong, has priced its shares at a relatively expensive 15 to 20 times forward earnings, hoping to take advantage of strong market liquidity, according to market sources.

The Jinan-based truck manufacturer is selling 702 million new shares at HK$10 to HK$12.88 per share, in order to raise HK$7 billion to HK$9 billion, according to a sales document obtained by fund managers.

The offering has earmarked 90 per cent of the shares for institutional investors with the remaining to go into the public tranche. The international roadshow started yesterday and will close on Wednesday next week.

The public offering will take place from Thursday to next Tuesday. Trading is expected to start on November 28.

Sinotruk, together with its parent Sinotruk Group, is the largest heavy truck manufacturer in the mainland. Sinotruk accounted for more than 90 per cent of its parent's total sales of heavy trucks.

Sinotruk Group has about a 20 per cent market share of heavy truck sales in the country.

Its bigger rivals, Dongfeng Motor Group and FAW Group, mainly produce low-tonnage trucks, while Sinotruk dominates in the large-tonnage, heavy-duty truck sector.

Sinotruk's initial share sale was planned at US$500 million but has been more than doubled on strong investor appetite and abundant market liquidity.

The listing candidate brought in eight key investors: Li Ka-shing and Dickson Poon, BOC Investment, China Life Investment, Singapore's GIC, Kerry Properties, Hong Kong-listed Citic Pacific and New World Development. They were each paying US$25 million for the shares, a source said.

JP Morgan and BOC International are the joint sponsors of the offering.

The company has organised its business into four segments comprising the truck manufacturing, engines, its own finance company, and a design and research arm.

The truck business posted a gross profit margin of 15 per cent for the first three quarters of the year, while engines pulled in 19.3 per cent.

Sinotruk's principal products are heavy trucks, including cargo trucks, chassis and semi-tractor trucks under four series: HOWO, Sitaier King, Sitaier and Huanghe. Each is further divided to target different customers.

The company produced 70,248 heavy trucks in the first three quarters this year and sold 63,274.

The HOWO series is the company's latest product line, introduced in 2005. The high-end truck accounted for 63.1 per cent of total sales in the first three quarters.

Sitaier King, targeting the mid- to high-end market, and the Sitaier series, the company's mainstream product in the domestic market, each accounted for 19.1 per cent and 16.7 per cent of total sales in the same period.

The Huanghe series, their first product developed in the 1960s accounted for 1.1 per cent.

Sinotruk also produces key truck parts and components internally, such as cabins, diesel engines, truck frames and axles.

About HK$700 million of the proceeds from the offering will be used to expand truck manufacturing capacity and enhance technology at Sinotruk Jinan Truck Company, including the construction of its new manufacturing facilities.

Sinotruk also plans to spend 600 million yuan to increase the capacity of its Jinan Commercial Truck Company from 10,000 units to 30,000 by the end of the year and to 50,000 by 2010.

The project will be financed by bank borrowings, working capital and proceeds from the share sale.

For the engine business, the company will set aside HK$800m to expand its forging capacity and enhance technology at Sinotruk Jinan Power in Zhangqiu district. Another HK$1.2 billion will be used for expanding the engine manufacturing capacity and technology of Sinotruk Hangzhou Engine and the relocation of its engine manufacturing facilities.

Sinotruk has decided to relocate its engine manufacturing operations from Hangzhou to Xiaoshan district in the suburbs for expansion. Construction is expected to be completed by next year.

The company has rapidly expanded its overseas markets, particularly in the Middle East and Russia. Exports contributed about 16.7 per cent of the company's sales revenue by the end of September this year compared with 0.9 per cent in 2004.

The firm also plans to use HK$500 million for domestic and overseas market expansion, while HK$2 billion is earmarked to repay bank loans and trade payables.

Sinotruk wants to strengthen its position in the larger categories of heavy trucks and to globalise its business.

It plans to further expand its domestic sales and service network to penetrate new regional markets. For overseas expansion, the company will continue to target markets based on their similarities with the mainland market in terms of customer needs and purchasing power.

Sinotruk has set up a truck manufacturing joint venture with Swedish truck maker Volvo, the world's second-largest. Sinotruk also holds a 63.78 per cent of Shenzhen-listed CNHTC Jinan Truck.

Two weeks ago, mainland diesel engine maker Weichai Power issued a letter to Sinotruk Group and other companies, accusing them of infringement of patents and seeking compensation for losses incurred.

What the analysts say

Francis Lun Sheung-nim, general manager, Fulbright Securities

Pros: With the mainland's economy continuing to expand, demand for heavy trucks will remain strong

Cons: Sinotruk may find it difficult to handle rising costs of raw materials such as steel

Kenny Tang Sing-hing, associate director, Tung Tai Securities

Pros: Sinotruk will benefit from truck replacement demand as the mainland must abide by Euro III emission standards

Cons: The profit margin is not very high and the share price may lag behind overall market performance over time

Chan Yuk-keung, fund manager, Philip Asset Management

Pros: The heavy-truck industry should be able to see continuous growth

Cons: It may be difficult to avoid the impact of rising raw materials prices