Aluminium is used to support everything from skeletal skyscrapers to young saplings. Can it also help prop up banks' equity capital market desks?
Bookrunners for China Zhong Wang, Asia's biggest maker of aluminium extrusion products and the name behind the world's first $1bn-plus initial public offering since last August, hope so. Early signs are good. On Monday it set a gung-ho price range which could see it raise up to $1.6bn. Markets seem welcoming, with the FTSE All World stock index up 28 per cent since its March 9 low. On the Hong Kong market, where Zhong Wang will list, daily turnover has meanwhile risen by a fifth over the same period. Recent listings on big exchanges have been tiny but performance has been encouraging. Rosetta Stone, a language software provider, has risen 57 per cent since its New York debut.
Zhong Wang's pitch is hitched to China's near-$600bn economic stimulus package. The group makes parts for railcars and tracks, which should benefit from Beijing's transport spending splurge. Business is almost wholly domestic and one-third of its revenues accrue from trains, where mainly government entities write the cheques. Net income basically doubled in the year to 2008 to $280m. But there are risks too. Supply of the most abundant metallic element in the earth's crust may not be a problem, but pricing is. Once existing supply contracts expire, Zhong Wang could find itself on the hook for pricier aluminium for at least some of its products. Gross profit margins, at 42 per cent, will be tough to sustain in a slowing economy. And the bookrunners' ability to corral cornerstone investors for Zhong Wang's IPO – typically, local tycoons who lend support by agreeing to lock-in periods – has evaporsated in volatile markets.