Trigiant’s IPO call may not connect

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HONG KONG (Dow Jones Investment Banker) – Trigiant Group Ltd. has just filed a web proof information pack (WPIP) with the Stock Exchange of Hong Kong, the first step towards its proposed IPO. Little information has filtered about the structure of the deal, but a quick round up of ECM desks indicates that the mandate wasn’t competitive. Despite a limited trading history, the company has posted impressive growth rates and enjoys significant market share in an industry it dominates alongside two major competitors. At the same time, its reliance on a small number of clients and suppliers, and its high gearing, raise questions about the sustainability of its business model, as do some troubling past financial practices.

The Yixing City-based company was established in 2007. It’s one of the leading manufacturers and sellers of radio frequency (RF) coaxial cables, electronic components and related accessories for mobile communications and telecommunications equipment in China. It ranked first in 2010 for the sale of RF coaxial cables in the PRC, with a market share by revenue of 23.5% – although competitors Hansen Technology Co., Ltd and Hong Kong/Singapore dual-listed Hengxin Technology Ltd. are not far behind, with 20.4% and 19.3% of the market respectively.

Some 93% of Trigiant’s sales are RF coaxial cables, a proportion that has increased materially since 2008. These are used in mobile communications networks including highways, railways, tunnels, underground facilities and high-rise buildings. Consulting firm CCID calculates that Chinese demand for such cables increased from 83.9 thousand kilometers to 408.2 thousand kilometers between 2006 and 2010.

Trigiant’s distribution network covers 31 provinces and municipalities, but a majority of turnover came from sales made under annual tenders to China’s three major telecommunications operators: China Mobile Ltd, China Unicom Hong Kong Ltd (to whom Trigiant was the largest supplier in 2009) and China Telecom Corp Ltd.

The group has made attempts to diversify its portfolio of customers and is also exploring opportunities overseas, in particular in Brazil, India, Russia and South East Asia. It has made inroads as a supplier to Co. and the proportion of its sales made to China Unicom has shrunk from 90.2% in 2008 to 46.8% by the end of May 2011. However, sales to its top five customers still accounted for almost 98% of turnover at that date – not materially lower than the 99.9% they represented in 2008.

The story is much the same on the supply side. Trigiant’s top five suppliers account for almost 82% of purchases, with more than half of total purchases from a single source. Supplies mainly consist of raw materials, including copper (whose price has seen significant fluctuations in recent years), as well as polyethylene and PVC.

Trigiant has enjoyed compound annual growth in turnover of more than 146% between 2008 and 2010 to almost US$111 million, while net profit over the same period grew almost 215% to just below US$24 million. Despite comfortable interest cover, the group is highly geared at 190% (excluding pledged bank deposits). Although that’s not uncommon for a young business, in much of its relatively short history Trigiant’s cash flow from operating activities has been negative and it has carried out its business mainly thanks to short-term borrowings.

The company has also disclosed significant trade finance deals entered into with PRC banks that were not supported by underlying transactions – and not in compliance with PRC laws. Details of these cover no fewer than 11 pages in its WPIP, and raise serious questions – even if these activities have been discontinued and appropriate procedures introduced.

Trigiant has carved a comfortable little niche for itself but it’s not clear if it has the muscle to evolve from there. Raising funds via an IPO might help. But, if there’s any guidance from the disappointing performance and low liquidity of Hengxin, which floated through a secondary listing in Hong Kong after a US$12 million IPO last December, in this choppy market investors may perhaps prefer to focus on more obvious, more transparent and more visible stories. With a new issue pipeline of up to $35 billion coming to Hong Kong over the next few months, Trigiant should wait until it’s more mature – and explore other ways to pay down debt.

(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 30 August 2011 and is reproduced with permission.]

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