Banking & Finance

Billion dollar IPO on track

Zhongwang may revive the Hong Kong market for Chinese listings

Billion dollar IPO on track

Wake up! There's a train-related IPO coming!

In times like these, an IPO needs all the help it can get. Little wonder then that Zhongwang – an aluminium firm – has calibrated its price range so that if it prices at the top, Hong Kong’s retail investors will get a board lot for HK$8,888.80. In case you weren’t aware, the number 8 symbolises ‘wealth’ in China. That being the case, this looks like a very savvy marketing ploy.

Bankers in Hong Kong will be hoping it works. Since the onset of the financial crisis, IPOs have been as numerous as novels set in Liechtenstein. Zhongwang’s initial public offering will raise upwards of $1 billion – a huge figure in today’s context.

Zhongwang’s management will have their fingers crossed that the tentative optimism on the Chinese economy (see this week’s Talking Point) will drive demand for its stock. Some economists and analysts are forecasting that China has bottomed out and could be the first to pull out of the global downturn in the second half of the year.

Regardless of whether that is the case, Zhongwang has a pretty good story to tell. That’s because the aluminium extrusion firm is largely a play on the Chinese government’s current mania for building high speed railways. Zhongwang, which produces about 535,000 tonnes of aluminium a year, makes moulded aluminium products such as rail cars.

That’s a good spot to be in right now. Earlier this year, China’s deputy minister for railways, said the government will spend Rmb700 billion ($102.5 billion) on its rail network in 2009. And spending isn’t going to end there. China’s rail density is only a tenth of Germany’s – so there’s plenty of scope for expansion.

That’s also what the IPO is for. Zhongwang plans to spend about 35% of the proceeds of the IPO to boost its production capacity by 50%: reaching 800,000 tonnes of aluminium per year by 2011.

The company’s founder and controlling shareholder, Liu Zhongtian has made all the right moves so far. As reports, he took the prescient decision several years back to switch the firm’s focus from supplying China’s very frothy construction sector, to a new concentration on train parts. He thus switched into a higher margin area – and at precisely the right time. Net income at Zhongwang doubled in 2008 to $280 million.

Based on a valuation of 10 times this year’s projected earnings ($440 million), the IPO should be around $1.1 billion. Liu plans to sell 26% of the company; with 10% of the deal going to retail investors and the remainder to institutions.

Interestingly enough, the deal – thus far – does not have any cornerstone investors. Back in the go-go days of the Hong Kong IPO market, it was received wisdom that every big China deal needed a local billionaire – such as Li Ka-shing, or Lee Shau Kee – to take $50 million or more of the deal as an ‘anchor’ investor. The practice was very lucrative for local tycoons. But in these choppier times, the Hong Kong tycoons seem less ready to commit to the requisite six month lock-up period. No doubt they will be back as an “essential” part of the IPO process once the next bull market returns.

Zhongwang is scheduled to list on May 7.

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