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Haitian International Holdings join list of Hong Kong (China) IPO hopefuls

11 December 2006

Haitian International and Ming An Insurance join four other companies to kick off retail offerings to vie for investors before the Christmas holidays.

Another two listing hopefuls will kick off the retail portion of their Hong Kong initial public offerings today as part of the final capital markets spurt before the year ends.

Hong Kong general insurance company Ming An (Holdings) and the world?s largest producer of plastic injection moulding machinery (in terms of production volumes), Haitian International Holdings, will seek to raise a combined $371 million, adding to what is already a record year in terms of IPO fund raisings in the Hong Kong market.

According to the stock exchange website and including the three listing candidates that completed and priced their IPOs over the weekend, 49 companies have raised a combined HK$296.6 billion ($38.1 billion) via listings on the Hong Kong main board this year. This compares with HK$190.8 billion in 2005 and HK$94.5 billion in 2004.

The 2006 total is obviously boosted by Industrial and Commercial Bank of China?s record breaking $21.9 billion IPO in October, which has accounted for more than half of the new funds raised so far.

Ming An and Haitian will come hot on the heels of four other listing hopefuls ? Sunlight Reit, 3Cems Corp, Xingda International Holdings and Zhuzhou CSR Times Electronic ? which all launched the public portion of their offerings on Friday. In aggregate, these four companies are trying to raise up to $838 million, while China Coal will wrap up its $1.7 billion offering later today.

However, bankers believe the current strong appetite for new listings and the growth stories told by Ming An and Haitian will enable the two companies to attract enough support to reach their fund raising targets before fund managers close their books for the year.

Having started the international bookbuild on Wednesday and Thursday respectively, both offers will close on Thursday, December 14, with Ming An due to fix the price on that day and Haitian following two days later. Both stocks will start trading on December 22.

Haitian?s offer will be the larger of the two ? up to $202 million - and will also represent a classic play on the China growth story, given that it produces machinery for the manufacturing industry. The Ningbo-based company, which is collectively owned by the founding family and other members of the management, is also a direct beneficiary as more and more of the world?s producers of moulded plastic products move their manufacturing to China. The Mainland currently accounts for about 60% of the global market for plastic moulding machines.

Last year, Haitian had a 28% share of the Chinese market for plastic moulding machines and 17% of the global market. Its portion of sales derived from exports has increased to more than 30% last year from less than 20% two year?s earlier and this is expected to increase further over the next few years. It now sells its machinery to 80 countries.

The company, which is brought to market by BNP Paribas and UBS, is offering 399 million new H-shares, or 25% of the company. The price will range from HK$2.77 to HK$3.95 for a total deal size of HK$1.11 billion to HK$1.58 billion ($142 milion-$202 million).

As usual with Hong Kong offerings, 10% of the deal will be earmarked for retail investors and there will be a greenshoe that could boost the deal size by 15%.

The price range will value the company at 10.5 to 15 times its 2006 earnings, which is expected to increase 37% year-on-year to no less than Rmb420 million, according to sources. On a 2007 basis, the PE multiple will drop to 8.5 to 12.2 times as earnings are expected to rise by about 20% next year.

This will pitch the company at a slight discount to Hong Kong comparables like Lung Kee (Bermuda) Holdings, which makes mould bases and also trades metals and parts. Lung Kee trades at about 16.5 times its estimated 2006 earnings, while heavy machinery manufacturer Weichai Power is quoted at 16 times. Chen Hsong Holdings, which is China?s second largest maker of plastic injection moulding machinery but well behind Haitian in terms of volumes, trades at a 2006 PE of only 10 times, however.

Husky Injection Moulding System, which is the largest moulding machinery company in the world in terms of sales, trades at 17 times. Being somewhat smaller than Haitian with a market cap of about $500 million, Husky focuses on customised machines which are common in Europe.

Haitian, on the other hand, has primarily been making general machinery, which can be produced in larger quantities and are widely used by Asian manufacturers. To support its earnings growth, the company will shift its production more towards customised and large tonnage machines, which have better margins.

The company sold 14,600 units in 2005, compared with 11,700 units in 2003 and will surpass 20,000 next year when a new factory in Wuxi will start commercial production. The soon-to-be-completed factory will have the capacity to produce 6,000 500-tonne machines per year.

The company is currently able to produce machinery with a capacity between 80-tons and 4,000 tonnes, but is looking to also start producing 5,000-tonne machines. Large tonnage machinery can be used either to produce large items like car bumpers, or for large quantities of smaller items like pharmaceutical bottles and other packaging for consumer goods. Haitian?s customers include Guangzhou Honda, white goods manufacturer The Haier Group and electronic products manufacturer Hisense.

What could make investors hesitate is if they believe that the cost of raw materials, including steel and oil, will continue to fluctuate as this tends to make customers hold off on ordering new machinery. Official statistics also showed that China?s industrial production growth slowed to 14.7% year-on-year in October, compared with 19.5% in June, which could prompt some concerns that the company may be coming to the market as the economy is peaking.

However, in the first 10 months this year, the auto industry in China ? one of the industries Haitian supplies with machinery - sold 5.77 million vehicles or 26% more than in the same period last year, according to the China Association of Automobile Manufacturers.

Meanwhile, Ming An is hoping to grab investors? attention because of an impending roll-out of insurance services in Mainland China. The company in May became the first insurance company incorporated outside of China to be gain approval to be regulated as a PRC insurance company, which will give it full access to the Chinese general insurance market.

Until now it has been able to conduct limited business in China, but like all other foreign-invested insurance companies it has been barred from certain types of business, such as the provision of third-party motor insurance which is mandatory for all drivers and a very lucrative market. Last year, motor insurance accounted for 66.9% of total general insurance gross premiums in China. Commercial property, by comparison, made up 11.6%.

In 2005, 24.1% of Ming An?s total written premiums of HK$1.1 billion was generated in China. The remaining 75.9% was attributable to Hong Kong, where it has a 3.5% market share and provides a wide range of general insurance products, including motor, property, liability, marine and accident and health insurance.

The PRC license opens up a ?new world of opportunities? for Ming An, which is the fourth largest provider of general insurance in the mature Hong Kong market where growth is modest at best, notes one observer.

?The earnings will likely take a hit next year as it pays for the expansion, but after that they can be expected to increase dramatically,? he says.

Ming An plans to use 85% of the IPO net proceeds to fund the roll-out of the Mainland business. It already has three branches in Shenzhen, Haikou and Guangdong and over the next two years it intends to establish a presence in as many as 12 other cities and provinces with sizeable insurance markets, including Beijing, Shanghai, Jiangsu, Zhejiang, Shandong and Hebei.

?Leveraging our dual Hong Kong-PRC status and our experience in the Hong Kong market, we plan to expand our presence in the PRC through a rapid branch network expansion and compelling product offerings,? Ming An Chairman Feng Xiao Zheng said in a statement issued ahead of today?s lunch.

The company is offering 700.3 million shares, or 25% of the company, of which 601.3 million will be new. Existing shareholders will sell 99 million shares as part of the deal. The indicative price range is HK$1.28 and HK$1.88, which will give a deal size of HK$896.4 million to HK$1.32 billion ($115 million to $169 million).

Again, retail investors will get at least 10% and there is a 15% greenshoe that could boost total proceeds to $195 million. Credit Suisse is sole sponsor and bookrunner of the offering.

According to market sources, the price range values Ming An at 1.25 to 1.65 times its post money book value. This marks a discount versus Hong Kong-listed PICC Property and Casualty, which trades at 1.9 times book and is considered the closest comparable.

Another selling point will be Ming An?s strategic partnership with Cheung Kong (Holdings), which bought a 29% stake in the company in June. In yesterday?s statement, Ming An said it believes it is ?poised to benefit from this partnership in terms of new client relationships, investment expertise and new sources of premium income.?

Having been founded by the PRC State Council as the flagship general insurer of the China Insurance group in 1949, the company is still 66.1% owned by China Insurance Holdings. The group?s Hong Kong-listed re-insurance unit China Insurance International Holdings also owns 4.9%.

After the IPO, China Insurance Holdings will own 49.6%, while Cheung Kong?s stake will fall to 21.7%. CIIH will hold 3.7%.

The company is expecting to post a net profit of HK$254 million in 2006, which will represent a 124% decline versus 2005. According to the listing document, the decline will be due partly to an anticipated 59% drop in underwriting profits, caused in part by a change in accounting methodology, and a 90% decline in the revaluation surplus of properties versus a year earlier. An increase in management costs associated with the opening of its Guangdong branch this year will also play a part, the company said.

Among the other companies of size currently in the market, 3Cems, a printed circuit board solutions provider, is looking to raise up to $90.8 million through ABN AMRO Rothschild. It is offering 344.8 million shares, of which 65% is new, at a price between HK$1.40 and HK$2.05.

Xingda International Holdings, which makes tire cords and bead wires for radial tires, is aiming to pocket up to $153 million from the offer of 386 million shares at HK$2.45 to HK$3.08 apiece. Goldman Sachs is arranging that deal.

Also on the second day of its public offering is Zhuzhou CSR Times Electric Co, a designer and manufacturer of electrical systems and components for the railway industry, which has enlisted Macquarie Securities to help it sell up to $245 million worth of shares. The 360.56 million H shares are offered in a range between HK$4.18 and HK$5.30.

All of those three offers will close on Wednesday December 13, with the price expected to be determined the following day.