Asia Cement seeks HK$2.4b fund to pursue expansion on mainland

PUBLISHED : Tuesday, 29 April, 2008, 12:00am
UPDATED : Tuesday, 29 April, 2008, 12:00am

Asia Cement (China) Holdings Corp, the mainland unit of Taiwan's second-largest cement maker, is raising as much as HK$2.42 billion in an initial public offering in Hong Kong to fund its expansion in the mainland's booming infrastructure market.

'The mainland infrastructure sector has been growing rapidly and demand for cement will remain high. Asia Cement's operation in China will be surely lucrative in such an environment,' said Yiu Chin, a director of financial analysis at Altruist Financial Group.

The Taiwanese-managed company, which is offering 375 million shares at between HK$4.85 and HK$6.45 each, began its institutional roadshow yesterday and is expected to open retail subscription next Monday. Its shares will debut on the main board on May 20 under the stock code 743.

The firm's prospectus obtained by a fund manager says Asia Cement expects to raise HK$2.02 billion if it prices the shares at HK$5.65 each, the midpoint of the indicative range.

The company plans to earmark 51 per cent of the net proceeds for plant expansions in Jiangxi, Hubei and Sichuan provinces. It will also set aside 22 per cent for strategic acquisitions and investments and use 17 per cent to repay loans. The remaining 10 per cent would go to general working capital, the prospectus said.

'Asia Cement's businesses are focused on the central Yangtze River and the southwest regions, both of which have recorded rapid growth in infrastructure over the past few years,' said Kenny Tang Sing-hing, an associate director of Tung Tai Securities.

'This [growth] allows cement makers like Asia Cement to reap more profits.'

With its principal factories in Jiangxi, Sichuan and Hubei, Asia Cement's output of four major products - cement, clinker, ready-mix concrete and blast-furnace slag powder - reached 8.2 million, 5.72 million, 811,000 and 1.29 million tonnes respectively last year.

The volumes increased from 5.77 million, 3.63 million, 498, 000 and 1.06 million tonnes in the previous year.

Turnover of the Jiangxi-based company jumped 66.67 per cent to 2.25 billion yuan (HK$2.5 billion) last year, while its net profit soared 277.36 per cent to 246.2 million yuan.

Felix Man Kam-fai, director of Hantec Futures, said Asia Cement might become a beneficiary of 'a less-volatile market lately'.

'The market actually seems to have seen an upward trend since early last week and may help boost investor confidence and interest in new stocks,' said Mr Man.

The Hang Seng Index has gained 3.82 per cent in the past week. Yesterday, the blue-chip index rose another 149.51 points to close 0.59 per cent higher at 25,666.29.

Mr Tang, while agreeing that a stable market might help increase Asia Cement's appeal to investors, said its comparatively small size would limit its growth.

'It is not as big, and therefore not as competitive, as its counterparts such as CNBM [China National Building Material] and Anhui Conch,' he said.

But the company's valuation of about 20 times would still make it 'attractive' to some investors, he said. 'It is a reasonable and, we can even say, a bit low valuation.'

Asia Cement's share price is set at about 15 to 20 times its forecast earnings for this year, compared with Anhui Conch Cement's 25 times and China National Building Material's 23 times.

By market value, Anhui Conch is about 10 times and China National Building Material some 4.5 times bigger than Asia Cement.

Shares of Anhui Conch fell 0.91 per cent to HK$65 yesterday. CNBM declined 2.92 per cent to HK$18.62.

Mr Yiu said that Asia Cement only had operations in parts of the country, which might limit its economies of scale and profitability.

But the cement maker argued that operating in the country's central and southwest areas allowed it to cash in on the rapid growth of the local construction and infrastructure sectors.

'It also helps us avoid intense competition with those operating in the country's coastal regions,' said an executive director of the company, who preferred to remain anonymous.

The mainland consumed 1.2 billion tonnes of cement in 2006, or 47.3 per cent of the annual global consumption.

The China Cement Association had forecast that the country's cement consumption would reach 1.37 billion tonnes last year, followed by a further increase to 1.68 billion tonnes by 2010.

A research report on the company said that Asia Cement would invest HK$1.03 billion raised from its share offering to increase its production capacity for clinker, a semi-finished product used to make different types of cement.

The cement manufacturer aims to boost its clinker production capacity to 13.9 million tonnes by the end of 2011.

What the analysts say

Yiu Chin, director of financial analysis, Altruist Financial Group

Pros: The mainland's infrastructure has been growing rapidly and demand for cement products will remain high

Cons: Asia Cement's operation is focused on parts of the country only, which will limit its future economies of scale and profitability

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

Pros: Asia Cement's price-earnings ratio is set at 15 to 20 times this year's forecast earnings, which is reasonable

Cons: The company is small compared with rivals such as Anhui Conch Cement and so will probably not be as competitive in the mainland market

Felix Man Kam-fai, director, Hantec Futures

Pros: The market seems to have seen an uptick from early last week and this may help investors regain confidence and interest in new offerings

Cons: Taiwan stocks are generally not popular among local investors and market reception towards Taiwanese-managed Asia Cement may be tepid