A weak IPO market in Hong Kong means that Asia Water Technology will have to convince investors that its latest portfolio addition brings some serious synergies.
Singapore-listed plant developer Asia Water Technology will have to convince investors of the synergies it can generate from its latest portfolio addition if it is successfully to launch an IPO in Hong Kong later this year.
Last month’s RMB409 million ($64 million) agreed acquisition of a 69% stake in private Chinese water BOT developer Nanfang Water should help the company achieve critical mass in order to support a dual listing, although market conditions may yet conspire against it. A dismal Hong Kong IPO market has only seen $1.4 billion raised as of June 2012, compared with more than $36 billion in 2011, while shares in the only other HK/Singapore dual-listed Chinese water company, Sound Global, have fallen by 32% since it listed in Hong Kong in September 2010, against a 13% decline in the Hang Seng index over the same period.
A fair valuation done by Shanghai International Tendering gave the 69% stake in Nanfang Water a valuation of RMB300-413 million ($47-67 million) using a discounted cash flow (DCF) method. The company holds equity stakes in Chinese water and wastewater treatment projects with a total design capacity of 1.165 million m3/d.
“Part of the problem in valuing companies in China is the premiums that buyers and sellers place on deal terms,” said Alex Ditchfield, an analyst at BDA in Shanghai who focuses on M&A in China. “Aside from earnings, other factors can influence the price such as getting a majority ownership position or buying a company with an offshore structure [such as Nanfang Water], which can reduce legal hurdles from the Chinese government.”
The Nanfang Water deal includes a RMB45 million ($7.1 million) earn-out provision for three years that will motivate current management to hit a net income target of RMB50 million ($7.3 million) in 2014. To finance the deal, Asia Water borrowed RMB300 million ($47.5 million) from its parent company and must also issue 433 million shares to the seller by 10 August.
The acquisition fits in with the strategy of Asia Water’s parent, Shanghai Industrial Investment Holding (SII), to become a top three player (behind Beijing Enterprises Water Group and Beijing Capital) in terms of plant portfolio holdings in the Chinese water market. Earlier this year, Zhou Jun, deputy CEO of SII, announced that aside from a secondary listing for Asia Water, he wanted the entire water group to hit a target portfolio capacity of 8.5 million to 10 million m3/d. The Nanfang Water purchase will get the group to 8.35 million m3/d, and should offer some synergistic potential, given that more than 80% of Nanfang Water’s treatment capacity is in the provinces of Hunan and Guangdong (see chart).