China COSCO, the country's largest container shipping firm and operator of the world's seventh largest container fleet, on Monday began marketing a Hong Kong IPO worth up to US$1.7 billion to fund its expansion. China COSCO Holdings Co Ltd, which is growing quickly thanks to China's trade-driven economic boom, plans to spend US$1.8 billion on an expansion that will see the capacity of its container ship fleet more-than-double to over 800,000 TEU by 2010 from 303,197 TEU as of March 2005. The deal faces a crowded Hong Kong IPO market. Top coal miner Shenhua Energy, number-five lender Bank of Communications and COSCO aim to raise over US$7 billion during June.
The company, which is selling 36.6 percent of its enlarged share capital, must also overcome market concerns that the global container boom is peaking.
However, the deal may attract strategic investment from Hong Kong billionaire Li Ka-shing, who controls Hutchison Whampoa Ltd, the world's biggest container port operator; and Singapore state investment agency Temasek Holdings [TEM.UL], sources familiar with the deal said.
China COSCO and its bankers HSBC, J.P. Morgan and UBS, plan to launch a formal management roadshow on June 13. It plans to price its deal around June 25, with a trading debut set for July 4, sources said.
China COSCO also holds 52.34 percent of Hong Kong-listed COSCO Pacific, which operates terminals and leases containers. COSCO Pacific owns 16.23 percent of Shenzhen-listed China International Marine Containers (Group) Ltd.
China COSCO competes with larger foes such as Maersk Sealand, Evergreen Marine and APL, the container shipping arm of Singapore's Neptune Orient Lines.
Early valuation talks indicate an equity value of about 33 billion yuan, or 7.9 times 2005 earnings. The container shipping business, which excludes already-listed COSCO Pacific's contribution, would be valued at around 5.5 times 2005 earnings.
By comparison, smaller rival China Shipping Container Lines, which went public last year, trades at 4 times forward earnings after rising by about 4 percent above its IPO price.
Denmark-based Maersk trades at 10 times, Evergreen commands 6.7 times and Hong Kong-based Orient Overseas (International) Ltd (OOIL), which ranks 11th among container shipping firms, trades at 3.7 times forward earnings.
Of China COSCO's $1.8 billion capital expenditure plan for 2005 and 2006, 30 percent will be used to buy new and bigger ships, over 40 percent will be used to buy containers, and 22 percent will be invested in terminals.
The spending programme is intended to lower fixed costs per TEU because bigger, newer, ships are more efficient to operate.
Propelled by China's rapid growth in the past two decades, the country's container throughput reached 61.8 million TEU in 2004, the highest in the world. That could reach 120-140 million TEU by 2010, a Chinese official said last week.
The global shipping boom boosted container rates by 17 percent in 2003 and a further 7 percent on 2004, according to Drewry Shipping Consultants, leading liners to invest heavily in new capacity and prompting worries that a glut looms. "Following one of the largest and longest upswings in the container sector we believe that as supply starts to exceed demand in late 2005, and early 2006, rates will come under pressure and valuations with them," Citigroup said in a report.
Drewry Shipping Consultants expects the world's container traffic to grow 11.4 percent in 2005 - 1.2 percentage points slower than 2004 growth - before easing to 8.2 percent expansion in 2006 and 6.2 percent in 2007.
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