Dongyue aims to diversify and cut risks from environmental policies

PUBLISHED : Wednesday, 21 November, 2007, 12:00am
UPDATED : Wednesday, 21 November, 2007, 12:00am

Dongyue Group plans to use the proceeds from its HK$1.37 billion initial public offering to diversify its revenue streams and lower the risks from stricter environmental policies.

Set up in 1987, Dongyue is the mainland's largest producer of HCFC-22, a widely used refrigerant in household and commercial air conditioners.

The company supplies air-conditioner makers such as Haier, Midea Group, Zhuhai Gree Corp, LG and Mitsubishi.

Accounting for about 70 per cent of all refrigerant sales last year, HCFC-22 is the dominant refrigerant used in the country, according to the China Association of Organic Fluorine and Silicone Material Industry.

Dongyue, which sells its HCFC-22 under the brand name Dongyue Lianbang, took about 38 per cent of the domestic market by sales volume last year.

The product contributed 393.9 million yuan in revenue in the first half, 35.1 per cent of total revenue.

However, the revenue contribution from HCFC-22 has been diminishing over the years, from 61.4 per cent in 2004 to 38.9 per cent last year.

The change reflects Dongyue's strategy to diversify its revenue sources, given pressure from changing environmental policies both domestically and globally.

HCFC-22 is a product regulated by the Montreal Protocol, an international treaty directed at restricting the consumption and production of chemicals that deplete the ozone layer.

The protocol requires the mainland to stop HCFC producers from increasing their production capacity after 2010.

Dongyue - which increased its designed annual production capacity of HCFC-22 from 120,000 tonnes to 150,000 tonnes in April - is planning to reduce the impact from the protocol by expanding the export of HCFC-22 to developing countries that are still not covered and to developed countries that use HCFC-22 as a raw material, which the protocol does not regulate.

The company will also increase its own consumption of the product as a raw material for making fluoropolymers.

In a move to further reduce dependence on HCFC-22, Dongyue has been expanding its production capacity in other products, including fluoropolymer, liquid alkali and silicone over the years.

Dongyue is already the largest producer of the fluoropolymer PTFE, polytetrafluoroethylene, a product for non-stick frying pans and microwave circuitry that uses HCFC-22 as a raw material.

PTFE accounted for 19.6 per cent of the company's total revenue in the first half.

According to its IPO prospectus, Dongyue is planning to use about 8 per cent of the net proceeds for developing its fluoropolymer business.

The company also plans to allocate 16 per cent of the initial offering proceeds to expand its liquid alkali business.

Liquid alkali, a material used in various industries, has seen its contribution to Dongyue's revenue grow from 0.6 per cent in 2004 to 11.4 per cent this year, helping to compensate for the drop in revenue from HCFC-22.

With a view towards becoming a leading silicone producer in the country, Dongyue will set aside 40 per cent of the proceeds for the construction of silicone production facilities with a 300,000-tonne capacity, following the completion this month of the 60,000-tonne phase one.

'The company's business is not widely known,' said Michael Wong, research director at Hantec Investment International.

'Given the bad sentiment in the market recently, the stock may not attract many retail investors.' Despite the technical barriers that might put off retail investors, Dongyue has lured three cornerstone investors to buy about 30 per cent of its new shares.

Bank of China Group Investment, Leslie Lee Alexander (owner of the Houston Rockets basketball team) and Kuwait China Investment have agreed to take up to US$62.5 million worth of shares, the preliminary prospectus states.

Dongyue was the first Hong Kong listing to attract Kuwait China, a Middle East investment firm that focuses on public and private companies in emerging Asia, market sources said.

The Shandong-based company is selling 520 million new shares or 25 per cent of its enlarged share capital at HK$2.05 to HK$2.63 per share, representing 12.5 times to 16 times its forecast earnings for next year.

Hong Kong retail investors can apply to buy the shares from next Monday to Thursday.

What the analysts say

Ricky Tam Siu-hing, director, Champlus Asset Management

Pros: There will be an increasing demand for air-conditioners on the mainland given higher income and warmer weather

Cons: Dongyue's IPO may be overshadowed by other big offerings such as China Railway Group

Patrick Yiu Ho-yin, associate director, CASH Asset Management

Pros: Some investors may be attracted by the unique business

Cons: The valuation is expensive compared with other industrial stocks

Michael Wong, research director, Hantec Investment International

Pros: There will be stable growth thanks to the fast-growing mainland economy and domestic demand

Cons: Market sentiment is not good and Dongyue may not be warmly received by investors