Xinchen China Power, a manufacturer of light-duty petrol and diesel engines, plans to raise US$113 million through a Hong Kong initial public offering to expand its production capacity.
Xinchen, controlled by Hong Kong-listed Brilliance China Automotive, which operates a joint venture with German carmaker BMW, is offering 313.4 million shares at an indicative price range between HK$2.20 and HK$2.80 each, representing a price-earnings ratio of seven to nine times based on forecast earnings for this year. Under a greenshoe provision, which would allow the underwriters to sell more shares to meet demand, proceeds could rise to as much as US$130 million.
"Final pricing of Xinchen's new shares is likely to be set near the top of the range, as the deal offers a meaningful discount to its US- and Hong Kong-listed peers," a banker familiar with the deal said. He said the BMW-licensed engine technology allowed investors to be confident the firm could replicate the runaway success of Brilliance, the shares of which have surged more than 68 per cent since a trough in July.
There are no direct comparables for Xinchen, but its closest peers, such as Hong Kong-listed Xinyi Glass and Weichai Power, trade at an average price-earnings ratio between 10 and 14 times, offering significant upside potential for Xinchen's shares.
About 65 per cent of the proceeds will fund expansion of production capacity, and 24 per cent will be for new product development, while the remainder will be used to build a research and development centre in Chengdu, Sichuan province, according to the prospectus.
The firm aims to expand its production capacity to 300,000 engines this year from 255,000 last year. It will establish a joint venture with mainland carmaker Dongfeng Motor to add further capacity of 200,000 for Dongfeng's light-duty vehicles. Wu Xiaoan, Xinchen's chairman, said yesterday that engine orders had been healthy so far this year and the firm was on track to meet this year's production and sales target of 300,000 units.
The firm planned capital expenditure of 390 million yuan (HK$486 million) this year and about 200 million yuan next year, Wu said. It expects to price the offering on March 5 and start trading of the shares on March 13.