In this section, we will take a newly listed company in Hong Kong Stock Exchange this year as an example for further explanation. We will use those data taken from its prospectus for analysis. This company is :
Nine Dragons Paper (Holdings) Limited (2689) - abbrev : ND Paper
Questions :
1. Is the industry has a growing demand? What is the relationship between demand and supply in the industry?
Ans : Yes, the industry has a growing demand. In the "Industry Overview" section, the company has provided a clear picture of the demand and supply relationship in the industry. The consumption of containerboard has exceeded its domestic consumption in the past five years and this trend is forecasted to continue at least to 2009. Furthermore, the entry barrier is this industry is high as it requires huge capital investment to install new production line. At the moment of IPO, ND Paper is at the highest volume in the country. This has provided them a great advantage. Even an average company can perform well in a growthing industry.
2. Is the company profitable over a period of time and what are their average revenue and profit growth rates?
Ans : In the "Summary" section, you can find that the company has an average revenue and profit growth rates of 46.6% and 65.7%. The profitable trend have continued for the past years. Such growth is exceptionally good.
3. What is the company raising money for? Paying debts? Future development? etc
Ans : You may find the answer in both the "Summary" and "Future Plans and Use of Proceeds" sections. Not more than 55% of capital used for establishing new production lines. Not more than 35% used for paying short term loans and the remaining used as general working capital.
4. What are the major risk factors when investing in this company?
Ans : These information are located in both "Summary" and "Risk factors" sections. Most of them are general statements. However, one point should be noted that the major supply of recovered paper is controlled in the hand of its chairman for which this supplying company is not included in the IPO. This means that the profitability of the listed company is controlled in the hands of its chairman who can earn her own money by adjusting the price of supplying recovered paper. Besides those listed, you should also pay attention to the type of management of this company which gives hints in the "Directors, senior managements and employees". Most of the top management are relatives of its chairman for which a family business may induce problem in its long term development.
5. Are there any odd numbers in their financial statements?
Ans : After reading the "Financial Information" section, it does not show any very odd numbers but the debt ratio of the company is exceptionally high. This may be the reason why they need to issue IPO instead of running as a private company.
6. Is the IPO price reasonable when compared to its expected profits and dividends? Is it valuable when compared to those companies already get listed?
Ans : In the "Summary" section, the company has provided a forecast of expected profit in the past half year. The expected PE is 13.6 if the IPO is set at its highest price. This is quite reasonable when compared with Lee & Man Paper (2314) which was trading at around expected PE ratio of 14 at the time of ND Paper IPO.
7. Find out some key ratios for study such as ROE, ROA, PE, PB, Debt to Equity ratio etc.
Ans : Some of the key ratios are listed below :
ROE : 13.7% (Year 2005)
ROA : 2.7% (Year 2005)
PE : 13.6 (expected)
Gearing Ratio : 53.4%
Net Borrowings to Equity Ratio : 212.7%
From the above, it is clear that the company is not operating in a highly effective way and has a high debt ratio. But the growing industry and IPO may improve these figures in the future.
8. Any strategic investors? Which investment bank is the underwriter?
Ans : The strategic investors are listed is "The Corporate Investors" section. There are three corporate investors including Ample Glory Limited (Mr Kuok Hock Nien), Chow Tai Fuk Nominee Limited (Dr Cheng Yu Tung) and Bestfull Limited (Dr Lee Shau Kee). They are solely investors but not involve in the company's management and Dr Lee has a good track record as being a strategic investor. The coordinator and underwriter of ND paper are BNP Paribas Peregrine and Merill Lynch which also give good track record in IPOs.
From the above, the analysis of ND paper is positive in IPO and this also explains why this company has a huge gain after its IPO.
Remember : Even an average company can perform well in a growthing industry.
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