Sun Jianming, chairman of Global Ariel.
Photo by Sim Kih
Photo by Sim Kih
It is a beneficiary of China's property and construction boom. China has seen an increased urbanization rate over the years (39.1% in 2002 to 43.9% in 2006).
Upcoming events such as 2008 Beijing Olympics and 2010 World Expo in Shanghai are spurring the boom.
Last February, in Suzhou where Global Ariel operates, the PRC government approved the construction of an internal underground light railway system through the city.
It is the first prefecture-level city in China to gain approval for such a major project.
Jason Li, CFO of Global Ariel.
Photo by Sim Kih
Photo by Sim Kih
It is estimated to cater to at least 18% of the city’s total traffic volume and 40% of public transport usage.
Construction for the first railway line commenced recently and will be completed by 2011.
Based on the construction of Guangzhou Metro Line 2, which runs 23.3 km with only 20 stations, the Suzhou Metro Project will require approximately 6.8 million cubic metres of ready-mixed concrete.
Global Ariel is the largest ready-mixed concrete producer in Suzhou City, Jiangsu Province, and one of the top 5 in the whole of China.
It is one of only 2 listed players among the top 5, and has a market capitalisation of S$160 million (based on a stock price of 10 cents).
Most of its business comes from supporting the construction and infrastructure development of Suzhou, which has the 5th highest GDP amongst all PRC cities and is amongst the fastest growing cities.
Suzhou's growing economy and increase in capital investment will lead to a construction boom and higher demand for ready-mixed concrete.
Global Ariel recently acquired Wuxi Lianyou Concrete and Funing Concrete, which are located in other parts of Jiangsu Province. With this move, Global Ariel hopes to capture more of the construction demand in other parts of the fast-growing province.
Tour of Global Ariel concrete plants
The cost of coarse aggregate constitutes the 2nd largest proportion (about 22%) of raw material costs. An average of
Barges transport raw materials for making cement to Global Ariel's plants, lowering costs. Picture by Dave Tan
The supply of raw materials from within the Group not only helps to strengthen its supply chain and lower production costs, but also allow a certain control over fluctuations in the price of coarse aggregate and chemical admixture.
Another cost-savings measure is the transportation costs of raw materials through the river networks of Suzhou.
All of the Group’s concrete mixing plants are located near rivers and raw materials such as coarse aggregate,sand and cement are transported to the plants using company barges.
In addition, the Group has also recently installed Global Positioning System devices on its fleet of concrete mixers and pump trucks to enhance the efficiency of its land transportation and allow better allocation of resources.
The Group is also able to provide better customer service with prompt updates on the delivery status.
Growing interest from foreign investors
There has been increasing interest from foreign investors in China’s construction sector. Recently, Goldman Sachs bought a 25% stake in Hongshi Group, the second largest cement maker in Zhejiang province, for RMB600 million.
MS Asia Investment, a private equity unit of Morgan Stanley and International FinanceCorp, in April last year paid RMB1.27 billion for a 14.3% stake of Anhui Conch Cement, the largest cement maker in China.
Recent NextInsight story: GLOBAL ARIEL: A play on China's property boom
Link Hi's production capacity of steel pipes has shot up from 74,000 tonnes in 2006 to 209,000 now.
To visit Link Hi, we traveled to neighbouring Wuxi, where Mr Gong Yucai, Link Hi President, briefed us on the company’s growth prospects and the worldwide market outlook.
World oil demand is expected to continue growing, which will spur demand for steel pipes used in oil exploration and production. This will drive Link Hi’s revenue growth.
For FY2006 (ended Dec 2006), its total indicative production capacity of steel pipes was 74,000 tonnes.
Since then, capacity has expanded with a new line (Line 355) and 55%of Dingyuan acquired, resulting in the total indicative capacity rising to approximately 209,000 tonnes (taking into account 55% of Dingyuan’s 100,000 tonnes indicative capacity).
Dingyuan is one of the largest non-government seamless precision pipe manufacturers in China. It is engaged in the production and sale of various cold-drawn seamless steel pipes and cold-drawn special-section seamless steel pipes.
Link Hi is engaged in value-added work that will allow it to increase its overall selling price and improve profitability.
Management hopes to see the full effect of ramped-up capacity in FY2008. Initial sales have been encouraging and the management is seeking to increase the number of orders for the new line.
Management has stated its intention to build two additional production lines for Fastube Energy, a 100%-owned subsidiary set up to engage in R&D, design, manufacture and sale of higher-valued steel pipes to meet the more stringent demands of the oil & gas industry.
Contribution from Fastube started in 2H2007, with the first threading and upsetting line completed and thesecond scheduled for completion early this year.
Engaging in more such value-added work will allow the Group (market cap: S$46 million, based on stock price of 36.5 cts) to increase its overall selling price and improve profitability.
Link Hi has been collaborating with the biggest oil pipe technology research institute, CNPC Research Institute of Tubular Goods, to enhance its technology, and also possibly to produce new products like coiled pipes.
Few companies in the world are able to manufacture coiled pipes.
Moving forward, Link Hi plans to set up sales offices or companies in North America, EU and South America. There are also plans to secure deals with major overseas clients directly.
Currently, Link Hi is a certified supplier to Sinopec. It is progressing to secure rights to supply to CNPC and CNOOC.
An industry peer listed on NYSE is trading at 21X '07 PE while Link Hi is doing 10X '06 earnings.
Wuxi Fastube is a specialist in the production of various types of precision welded steel pipes. It can produce various high quality steel pipes (highest grade is N80).
The main equipment in the plants include fully solid-state high-frequency welder, online seam heat treatment, on-line eddy current & ultrasonic detector and four sets of hydrostatic tester (maximum pressure is70MPA).
The products have uses as oil and natural gas pipes, automobile pipes,precision machinery pipes, and low and medium pressure boiler pipes.
Listing of an industry peer on NYSE
On 6 December 2007, an industry peer of Link Hi, WSH Holdings Ltd Ads (NYSE:WH), a Wuxi-based manufacturer of metal tubing for oil and natural gas exploration,drilling and extraction, raised US$213 million with the sale of 25 million ADR priced at US$8.50 each.
At its current price of US$9.29, WSH Holdings is trading at 20.6x FY2007’s earnings and P/BV of 1.7x. In comparison, Link Hi trades at 9.8x FY2006’s earnings.
