Talking Point

Investors don’t dig it

Sany braves grim market conditions before pulling out of Hong Kong IPO

Sound foundations: Sany offers investors a play on China’s infrastructure and property markets

Getting ‘listed’ has been very much on Liang Wengen’s mind this month.

Liang is chairman of construction machinery giant Sany Group, founded in Hunan province in 1989 as a welding materials factory.

And the first ‘list’ he made this month was Hurun’s ranking of China’s richest, where he took pole position with an estimated $11 billion fortune.

The same week he topped a rival wealth ranking, this time compiled by Forbes (although he came in significantly worse-off, at a belt-tightening $9.3 billion).

In fact, an astonishing seven executives from Sany made it onto the Forbes list, with three of the group joining Liang in the dollar billionaire ranks.

Not that they will necessarily have been delighted with the news: as far back as WiC16 we wrote that China’s elite have mixed views on acquiring a prominent ranking in such lists.

But the listing that most concerns Liang right now is not compiled by a magazine. Rather it’s Sany’s attempt to IPO on the Hong Kong Stock Exchange. And the $3.3 billion effort has just had to be pulled…

So it’s not gone to plan?

The week started out with Sany and its bankers in bullish mood, even though markets in Hong Kong then fell to a 26-month low the same day.

The original plan had been for a shorter-than-usual period of bookbuilding, followed by the second largest share offering in the territory this year, trailing only Glencore’s $10 billion dual sale in London and Hong Kong in May.

Sany’s push to IPO has been a determined one, especially given that almost $12 billion of Hong Kong’s share sales have been withdrawn or postponed since May.

In fact only one Chinese firm – shoemaker Hongguo – has completed a Hong Kong IPO since Standard & Poor’s downgraded US government debt in the first week of August.

Hongguo priced this week at the low end of the range.

Further indicating the sour sentiment, Shanghainese restaurant chain Xiao Nan Guo cancelled its $95 million IPO on Wednesday.

Sure enough, Sany was soon backpedalling too.

First it delayed the launch of the retail portion of the offering, saying it needed to take a few more days to sell the deal to institutional investors.

But by Thursday – as Hong Kong markets slumped again – Sany decided to postpone the whole thing.

“Management will complete its international roadshow as planned, with a view to relaunching the transaction once conditions in the market improve,” the Sany team told reporters.

Why the rush to list in these awful market conditions?

In part because analysts say we are in the final phases of a boom for the construction machinery makers, after a golden era unleashed by the $586 billion stimulus package in late 2008.

Share prices in the sector have outperformed the market in general. Profits have held up better than most too, even as the effects of the stimulus have started to fade and anxiety grows about the future direction of the economy.

At the same time, there is also acceptance that the high-octane growth fuelled by the surge in highway construction, the spread of the high-speed rail network, and the resilience of domestic property prices looks unlikely to be sustained at the same levels in the months ahead.

Fixed asset investment – a key indicator for the sector – is also slowing, down from its peak of 30% growth in year-on-year terms two years ago.

But the outlook is not too gloomy, says HSBC. For one thing, fixed asset investment is not going to disappear completely. Far from it: the forecast is for a 19% increase in spending next year. And over the longer term, China’s urbanisation story signals very positive news. Less than half of the population lives in towns and cities, well down on the 80%-and-above averages from countries like Japan and South Korea. As more Chinese move into urban areas, the demand for construction equipment will get a sustained boost. In the more immediate months ahead, there are already signs of this in the social housing campaign, with the building of 36 million new residential units.

So Sany looks well positioned?

Probably better so than many of its competitors, thinks HSBC.

Here WiC confesses limited knowledge of the more technical aspects of the sector. Fortunately, a research report authored this summer by HSBC’s Paul Choi does a good job in outlining the major points.

And it seems that Sany is ahead of its local rivals in at least two key business lines.

Firstly, it has a lead position as manufacturer of excavators (see picture on page 1), compared to competitors who are more reliant on sales of ‘wheel loaders’ (diggers with front-mounted, more horizontal scoops).

As construction markets get more sophisticated, more excavators are purchased than wheel loaders, so Sany looks good for the years ahead.

That also seems to hold true in concrete, another area where Sany’s machinery has a strong market position. That will likely be enhanced by new rules limiting on-site mixing of concrete which ought to boost demand for Sany’s pumps, trucks and mixers.

Fortunately, both types of equipment look poised for plenty of take-up in the social housing push too, even if demand for highway and railway construction slows a little.

How about competition from foreign brands?

The excavator business is one of the last areas in which foreign brands still rule the construction roost in China (companies like Komatsu of Japan, South Korea’s Doosan Infracore, and Caterpillar from the US are at the fore). But even here local brands have been making inroads, says HSBC, rising from a 14% market share in 2005 to 30% in 2010.

Sany is again at the forefront, having positioned itself as cheaper than the Japanese but with a better quality product than the Koreans (its excavators still rely on technology from Japan and Europe, allowing salesmen to champion their performance and reliability).

As a result, Sany bosses are chasing a bigger chunk of the market, with yearly production of excavators reaching 30,000 units this year. Also under construction: a second plant with capacity for a further 20,000 units.

Any obvious risks for investors?

Yes, let’s start with the fact that the Chinese firms making construction equipment now make up a crowded field.

Aside from XCMG Construction Machinery (from Jiangsu province), there is also Zoomlion (headquartered in Changsha in Hunan, the same city as Sany). It raised $1.67 billion last December in its own (more fortuitously timed) Hong Kong IPO.

China Business News has been reporting that Zoomlion now plans to issue up to $1.5 billion in 10-year bonds on the Singapore Exchange.

Fujian province’s Lonking is another challenger, and has also listed in Hong Kong.

Each of these firms is preparing for a new industry landscape: moving from a boom period in which all comers could grab a share of growth, to one in which the battle for market share is going to be more intense.

At the same time, surplus supply is also a growing risk for investors.

Going back to the excavators for a single example: HSBC’s estimate is that 412,000 units will hit the market by the start of next year, a huge jump on the 197,000 in 2010.

The situation isn’t improved by newcomers like China Rongsheng, a shipbuilder, also trying to break into the business. It too is building excavators, from a production base in Hefei in Anhui.

Tellingly, the overall increase in production leads HSBC to think that new supply could prove 77% higher than actual demand.

So, prepare for battle…

As competition picks up, pressure on prices must grow. Plus there are additional costs to chasing market share. Most of the construction equipment companies offer financial leasing terms to clients, hitting operating cashflow. Stock market listings will help to shore up their cash balances as they wait for client payments over the duration of contracts.

And in an oversupplied domestic market, another potential use of IPO funds is for further forays overseas. Sany seems ahead of the rest here too, says Economy and Nation Weekly. With manufacturing facilities in India, the US, Germany and Brazil, it reported international revenues of Rmb1.18 billion in the first half of this year up 37.5%.

Back to those lists…

Time Weekly reported this week that Liang is now set to join an even more elite club than Chinese mega-wealthy, and enter national politics.

It quotes official sources stating that the country’s richest man has been vetted and approved to join the Communist Party’s Central Committee.

That puts Liang on the shortest list of all, of the one-man variety.

He stands to be the first private sector entrepreneur to be elevated to this powerful body, serving as one of the 371 members of the Central Committee, which is made up of provincial governors, mayors of big cities, military representatives and the chairmen of China’s biggest state-owned firms.

Significantly, the group elects the 25-person Politburo (which, in turn, chooses the 9-person Standing Committee, the inner council that governs China).

Professor Pu Xingzu of Fudan University told Time Weekly that Liang’s selection is highly symbolic. After seeming to favour a ‘state capitalist’ model in recent years, Pu says this shows Beijing is now sending a more positive signal to the private sector.

The more immediate question: would it persuade investors to ignore the choppy markets and buy into Sany’s IPO?

Apparently not.


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