Tibet 5100’s IPO holds water

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HONG KONG (Dow Jones Investment Banker) – Tibet 5100 Water Resources Holdings Ltd is attempting to raise up to US$206 million in an IPO in Hong Kong. Although formally incorporated in the Cayman Islands as a red chip, if successful, it would be the first company from Tibet to list on the exchange there. The deal is small, but the growth rates posted by the company are impressive, as is its handle on costs, even if it remains very dependent at this stage on its cooperation with a rail transport operator.

Tibet 5100’s IPO is also one of several, including those of China Outfitters and hypermarket operator Sun Art, in the consumer goods sector to hit the market in Hong Kong in the early summer. These are a welcome change from the recent wave of expensive flotations of branded goods businesses, and may help restore confidence in primary issues.

The company, which began operations in 2006, produces a leading brand in the fast-growing premium bottled mineral water market in China. Its name derives from its spring, which is located 5,100 meters above sea level in the Tibetan mountain ranges.

Annual per capita bottled water expenditure  in China currently stands at US$5.7, as compared with US$118.7 for Western Europe and US$120.6 for the U.S. according to Euromonitor. The figure in China is expected to increase by 28% between 2010 and 2014, with volumes in the premium segment set to grow much faster than those for mass-market mineral water–at a compound rate of 20.5%, as compared with 11.8%.

Retail sales volume and revenue of premium bottled mineral water represented 7.9% and 45.3%, respectively, of the overall bottled mineral water market in China in 2010, and Tibet 5100’s brand ranked first by volume in that segment last year, with a share of 28.5% . Tibet 5100’s main competitors are Groupe Danone’s Evian and Nestlé S.A.’s Perrier.

Its strategy focuses on penetrating institutional sales channels, an approach which distinguishes it from the competition. Targeted purchasers consist of rail transport operators, commercial banks, airlines, government organizations and other major corporations in China, which frequently have a large base of middle to high income customers, and significant bulk purchase needs.

In particular, Tibet 5100 has a strategic relationship with China Railway Express (CRE), which accounts for more than 80% of its business by value. The contract was renewed for three years in December 2010 to supply a specified volume of water, at a fixed price per bottle, every year. The company has also entered into sales agreements with Air China, the BP-PetroChina JV, and China Post, and has cooperative agreements with CCBI and ICBCI Holdings.

Sales by volume were up more than 137% between 2008 and 2010, reaching 81,576 tonnes of bottled water. Over the period, revenue rose more than 201% to over US$55 million, with profit up more than 868% to almost US$18 million. This appears to be a well managed company: the costs of extracting and producing its bottled mineral water declined from 50.0% of revenue in 2008 to 32.8% in 2010. The balance sheet is also sound, with no borrowings.

The offer size of 459.29 million shares, all of which are primary, may be increased through an over-allotment option of 15%. The syndicate’s top line is rather crowded for such a small transaction, with the deal led by JPMorgan, CCB International, ICBC, Citi and Oriental Patron as joint bookrunners–perhaps an indication that this was a sought-after mandate. The retail offer has now started, with pricing expected on June 23, and trading on June 30.

New issue proceeds will be used to expand Tibet 5100’s production facility, distribution network and M&A.

Tibet 5100 has secured cornerstone commitments totaling US$60 million, about a third of the initial institutional tranche of 90%, with subscription by Fubon Life Insurance and Profounders Private Equity.

The deal is being marketed using a price range of HK$2.62 to HK$3.50 per share, equivalent to a not unreasonable (having regard to the growth rates and the business’s high margins) prospective P/E of 14.6 to 19.4 times, based on the company’s profit forecast.

Amid shaky primary markets, Tibet 5100’s IPO might well be able to keep its head above water.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 21 June 2011 and is reproduced with permission.]

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