Lumena IPO may get lukewarm response

PUBLISHED : Tuesday, 02 June, 2009, 12:00am
UPDATED : Tuesday, 02 June, 2009, 12:00am

Lumena Resources Corp, the mainland's second-largest producer of the mineral thenardite, is expected to attract moderate demand for its HK$1.48 billion initial public share offering, taking advantage of the market rally.

The mainland company is selling 577.2 million shares - 404 million new and 173.2 million old shares - to existing shareholders at HK$1.72 to HK$2.56 each, according to a share sale document. That represents 30 per cent of the company's enlarged share capital.

The company has granted an option to the offering's bookrunners, including BOC International, Credit Suisse and Macquarie, to sell an additional 86.58 million old shares if demand warrants. After exercising the over-allotment option, the deal size could be increased to as much as HK$1.7 billion.

The indicative price range translates to between 5.8 and 8.7 times the firm's expected earnings this year, according to sources.

'The indicative valuation is not too pricey, as I think Lumena management and its bookrunners hope to use a lower valuation to lure investors, owing to the rare nature of its business,' said Matthew Kwok, the head of research at Tanrich Financial.

Patrick Yiu Ho-yin, the managing director at CASH Asset Management, said the overall market was turning more aggressive, and that could help the listing candidate to generate a solid response.

Three bookrunners began to receive orders from institutional investors globally yesterday after opening for local investors on Thursday.

The two tranches will both close on June 9, and Lumena is scheduled to start trading on June 16.

The company will spend at least 65 per cent of the proceeds for the partial repayment of an offshore bank loan.

About 13.5 per cent will be used for the construction of thenardite mining and production facilities and another 13.5 per cent will be used for the acquisition of additional mining rights. The remainder will go into working capital.

Thenardite is a sodium sulphate and is widely used in the production of powder detergents, dyes, textiles, glass, kraft pulp and pharmaceutical products.

China has the world's biggest reserves of glauberite, the mineral used to make thenardite, with total reserves of 10.5 billion tonnes. That accounts for 80 per cent of the world's reserves at the end of last year, according to independent market research consultant Behre Dolbear.

China is also the world's largest producer and exporter of thenardite. Domestic thenardite consumption has expanded at a rate of more than 15.5 per cent per year for the past decade along with the rapid growth of the world's third-biggest economy.

Behre Dolbear expects thenardite to continue to see significant growth in demand and consumption in key markets as well as in various new application areas.

Lumena mines and processes the mineral into three forms of thenardite - powder, speciality and medical purposes.

The average gross profit margin of Lumena's powder thenardite products reached 28.2 per cent, but speciality thenardite and medical thenardite generated 70.7 per cent and 77.8 per cent, respectively.

The rare nature of Lumena's business may deter the average retail investor from taking part in the share offering, and even some professional investors conceded they did not know what thenardite was.

'I have never heard of this chemical before, but the company's strong market position can be a selling point, as institutional investors are always keen on an industry leader,' said a fund manager who was invited to join the offering.

Currently, Lumena is the world's second-largest thenardite producer, with an annual capacity of 1.6 million tonnes, trailing only China Nafine Group, which has an annual capacity of 1.65 million tonnes.

Lumena posted a profit of 430 million yuan (HK$488.22 million) last year, up from 79 million yuan in 2007.

BOC International forecast the company would deliver a 19 per cent increase in net profit to 512 million yuan this year.

That would increase to 912 million yuan next year, driven by strong sales and the opening of a new factory outlet, which could help boost total production capacity to 2.8 million tonnes annually.

Lumena's offering will be the fourth sizeable flotation on the local bourse so far this year, contrasting with last year's lacklustre listings.

Investment bankers believe the listing market is improving, with the Hang Seng Index surpassing 18,000 points and rallying more than 65 per cent within three months.

'A healthy IPO pipeline is in place, as everybody wants to catch up to the current strong window to raise new capital,' said a banker.

What the analysts say

Matthew Kwok, head of research, Tanrich Financial

Pros: Healthy liquidity in the market could help draw a solid response from investors

Cons: The rare nature of Lumena's business may deter retail investors from buying its IPO shares

A fund manager

Pros: The share offer could generate interest from specific investors, such as commodity funds and speciality funds

Cons: Not too many investors are familiar with what thenardite is

Kenny Tang Sing-hing, executive director, Redford Asset Management

Pros: Lumena's strong market position can help it enjoy a high profit margin

Cons: Investors may hold the shares for a short time only

Market test

Lumena Resources Corp

Stock code: 67

Number of offer shares: 577.2m

Number of public offer shares: 57.72m

Number of international offer shares: 519.48m

Maximum offer price: HK$2.56

Board lot: 2,000 shares

Application lists close: Noon June 9

Announcement of offer price: June 15

Trading in shares to start: June 16