By: Derek Lim
One of my investor friend did a write up on the upcoming IPO in his blog. We share the same bullish sentiments but while I rate my probability of allotment as fairly high, he rated it as low. I will re-access this probability when the balloting results are out.
“Since its production capacity for urea and methanol have more than doubled since 1 January 2007, I believe my estimate of an 80% increases in earnings for FY2007 is not excessive.
Nevertheless, even with an 80% earnings increase, its PE Ratio is still estimated at 16.5x. Such a high valuation is uncommon, since most IPOs prefer to price themselves at single digit PEs so that the stock will do well upon listing.
However, China XLX seems to have a very clear idea of how they intend to use their IPO proceeds as stated in their future plans, which involves strategically expanding its production capacity and reducing its operational costs.
This could be why its IPO is so highly valued – in fact, it is rumored that the grey market for this IPO currently stands at $1.
In the current bullish market, certain china stocks, especially those with good growth stories and strong market share are able to trade at very high valuations. Some examples are MIDAS (70x PE), China Energy (55.7x PE), Sino Environment (54.2x PE), Yangzijiang (42.6x PE).
China XLX Fertilizer seems poised to follow in these stocks’ footsteps, and hence should do very well if the market stays bullish in the short term. This is the kind of stock that growth investors love, but value investors detest.
Probability of getting allotted for the IPO – LOW.”
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