Xiashun offering may be foiled as sentiment softens for new listings

PUBLISHED : Friday, 30 November, 2007, 12:00am
UPDATED : Friday, 30 November, 2007, 12:00am

Xiashun Holdings, the mainland's largest light-gauge aluminium foil maker, is unlikely to attract many retail investors in its initial public offering because of the weak sentiment towards new stocks, according to analysts.

Xiashun is aiming to raise up to HK$2.13 billion by offering 500 million new shares at HK$3.10 to HK$4.25 each or 25 per cent of its enlarged share capital, according to a sales document sent to fund managers.

'Retail investors absolutely won't have the same frenzy towards public offerings as before since prices of quality stocks like Sinotrans [Shipping] and Sinotruk fell below their offer price on their first trading day,' said Kingston Lin King-kam, an associate director at Prudential Brokerage.

'New offerings can't attract investors unless the valuation of stock is really cheap.'

Xiashun's price range translates into 14 to 19 times forecast earnings for next year which is close to the 17 times of Aluminum Corp of China, the country's largest producer of the metal.

Eva Yip, an analyst at Sun Hung Kai Securities, said the offer price range equated to 26 to 35 times forecast earnings this year, even higher than Chalco's.

Xiamen-based Xiashun has brought in BOC Financial Products, tycoon Cheng Yu-tung's private flagship Chow Tai Fook Nominee and Chinese Estates Holdings chairman Joseph Lau Luen-hung as cornerstone investors.

The order book for institutional investors opened on Tuesday and will close on December 10. Trading is scheduled to start on December 18.

JP Morgan and UBS are arranging the share sale.

The company's core product, light-gauge aluminium foil, is mainly used in the packaging for diary products, beverages, food and cigarettes.

Swedish drink-packaging giant Tetra Pak, which supplies mainland consumers such as China Mengniu Dairy and Inner Mongolia Yili Industrial Group, is Xiashun's largest customer.

Sales from Tetra Pak accounted for 35.4 per cent, or HK$431.88 million, of Xiashun's total sales for the first six months this year.

Xiashun generated 53.2 per cent of its revenue on the mainland and the United States is its largest overseas market with a contribution of 17.3 per cent of turnover for the first half.

Founded in 1988, the company has two plants and the combined production capacity has been improved to 80,000 tonnes from 48,000 tonnes earlier this year.

At 48,000 tonnes, Xiashun accounted for 6 per cent of global output last year, ranking fourth in the world. Its production volume is almost three times that of its closest mainland rival.

'We operate in an industry with a number of small to medium-sized competitors in China,' Xiashun said in the prospectus. 'We believe this market environment presents us with significant acquisition opportunities.'

About 30 per cent of its offering proceeds will be used for acquisition, 60 per cent to buy equipment and other items related to upstream expansion as it wants to reduce reliance on supply of aluminium coiled sheet to improve margin.

Its coiled sheet production is expected to begin in early 2010 with annual capacity of up to 200,000 tonnes.

Xiashun plans to use half of its coiled sheet production as raw material for production of core light-gauge aluminium foil, 37.5 per cent for complementary and new products such as lithographic sheet while the remaining 12.5 per cent would be sold to external customers.

The company will set aside 10 per cent of the listing proceeds as working capital. It plans to pay 20 per cent of net profit as dividends.

'The company is well-positioned to benefit from the high growth of the country's food and beverage sector, thanks to higher living standards and strong spending on consumer goods,' said a fund manager who was invited to join the international offering roadshow.

With rising disposable household incomes, mainlanders are consuming more diary products and looking for more clean, safe and convenient packages.

Consumption of light-gauge aluminium foil for food and beverage in the mainland is expected to have a compound average growth rate of 15.3 per cent from 2007 to 2010 with an estimated 34,550 tonnes being consumed this year, according to Sunlight Metal, a consultancy in the light metal industry.

However, some analysts said they were concerned about the impact of a rebounding aluminium price. Chalco raised its spot alumina price by 8.5 per cent on Tuesday to reflect tightening supply.

According to the prospectus, Xiashun estimates profit to grow 11.06 per cent this year to HK$238 million. Net profit last year was HK$214.3 million, up 8.4 per cent.

However, it might be difficult for the company to meet its earnings projection, as first-half profit fell 2.5 per cent to HK$108.8 million on higher costs despite a 37.2 per cent jump in revenue to HK$1.22 billion.

What the analysts say

Yiu Chin, director, Altruist Financial Group

Pros: The company is engaged in a unique business and there are no similar players in the industry that are listed in Hong Kong

Cons: It has a high gearing ratio of 48 per cent

Eva Yip, analyst, Sun Hung Kai Securities

Pros: Xiashun has brought in three cornerstone investors

Cons: Its price-earnings ratio is relatively high

Kingston Lin King-kam, associate director, Prudential Brokerage

Cons: There is no demand for initial public offerings in the market after the disappointing debut performance of Sinotrans Shipping and Sinotruk (Hong Kong)