Prosperity Minerals Holdings Limited
Prosperity Minerals is Cementing Profits in China
Many Chinese businesses listed in the UK are promising jam tomorrow. One exception though is
Prosperity Minerals Holdings, which is already highly profitable. It's an iron ore trader and cement manufacturer with significant expansion plans, yet it's only trading on a profit to earnings ratio (P/E) of between 6 and 7 times and yielding 7%.
It started with iron ore
Prosperity's story began in 1992 when David Wong, the chairman and chief executive, started up a business trading iron ore. This now supplies around 3.5 million tonnes a year to companies in China, primarily large steel manufacturers. China is the largest importer of iron ore in the world and currently imports of over 300 million tonnes. This total is expected to grow to over 500 million by 2014.
Prosperity is estimated to make a profit margin in the region of $7 per tonne of iron ore and it's recently been able to reduce its freight costs by sourcing more material from Thailand. Supplies are secured through long-term contracts but the scarcity of new resources means Prosperity will find it hard to increase the volume of ore it trades in the near future.
Cement comes into the mix
In the spring of 2006, Prosperity went through a significant period of change. A flotation on AIM in May raised £115m allowing it to pay for the acquisition of two new cement plants, Yingde Dragon Mountain and Prosperity Conch, which are located on adjacent sites in Guangdong Province.
Yingde Dragon Mountain began operations in 2004 and can produce up to 5.9 million tonnes of clinker and cement each year (clinker can be mixed with gypsum to make cement). It's wholly owned and has a mining licence than runs until 2023 for a nearby limestone resource of 136 million tonnes.
Prosperity Conch is a larger plant, able to produce 7.9 million tonnes a year, but Prosperity's holding is only 25%. It also has a mining licence for local limestone, with an estimated resource of 300 million tonnes. Production at this plant began at the tail end of 2005.
Shortly afterwards Prosperity acquired a stake in Anhui Chaodong, a Shanghai-listed cement manufacturer which operates a 2.7 million tonne plant in Anhui Province. A subsequent share restructure has resulted in Prosperity owning 33% of the company. Anhui has plans to build two new plants, creating additional capacity of 4.2 million tonnes.
For the year ended 31 March 2008, profits from the cement operations are expected to be in the region of $50m, almost twice the size of the contribution from iron ore trading.
Expansion plans go unnoticed
After this flurry of excitement, things went relatively quiet at Prosperity for a couple of years. In March o 2008, a major expansion of its cement operations was announced. Judging by the lack of reaction in the share price, this development seems to have been ignored by the market, but it will provide a significant boost to profits over the next three years.
A wholly owned plant, producing 2 million tonnes, will be built in Guiyang City in Guizhou Province. Prosperity will also own 55% of a similar sized plant in Dengta City in Liaoning Province. Both are expected to commence production by the end of 2009.
Prosperity will also take a 40% stake in a cement plant in Guangdong. This operation in Guangzhou City will be upgraded from 0.8 million tonnes to 2 million tonnes. Finally, it is taking a 30% stake in two new plants in Yunnan Province with a combined capacity of 4.5 million tonnes.
Together with the previously announced expansion at Anhui, these acquisitions will raise Prosperity's net cement output from just under 9 million tonnes today to around 15.5 million tonnes in three years' time. The combined cost will be around $190 million of which $100m has been raised by an issue of convertible notes.
Prosperity is keen to add other cement investments to its portfolio, preferring the joint venture route where it acts as operator. China's long-term growth will continue to boost demand for cement but the government is encouraging investment in new plants, like those operated by Prosperity, by introducing stricter environmental regulations. The number of cement operators in China is expected to reduce from 5,000 to as few as 2,000 by the year 2020 as smaller operators with obsolete plants are sidelined.
The Hong Kong kicker
The house broker, Evolution, is predicting pre-tax profits of $57m for the year to March 2008. A low tax charge, due to tax relief on the company's new cement plants, results in forecast earnings per share of around 20p. On a price earnings basis, this makes the shares look very cheap. Despite the expansion plans, Prosperity is also expected to continue paying dividends of 9p, making the yield on the shares highly attractive too.
Cheapness is not enough in today's cynical market to justify a price rise, so what could? Evolution believes a listing in Hong Kong, where cement companies trade on p/e ratios of 15 to 35 could provide the boost the shares need.
Unusually, the recent convertible loan agreement included a stipulation that the company would use its best endeavours to float on the Hong Kong Stock Exchange or an international equivalent. The company also said it was considering splitting its iron ore and cement businesses. Proceeds from any secondary listing could also help reduce the company's debts which Evolution is forecasting will increase to almost $200m in 2010 due to the investment in new cement plants.
Prosperity has a lot going for it yet it still trades some 10% below its float price of 148p. Its strategy of investing in secondary cities in China insulates itself from the areas of stiffest competition and it's clearly laid out its expansion plans giving good earnings visibility for the next few years. There are risks too of course, as margins could be squeezed by rising input costs or even the introduction of price controls. Nevertheless, the shares look unlikely to remain as cheap as this for much longer.
Register here to be notified of future Prosperity Minerals Holdings Limited articles.
Other Prosperity Minerals Holdings Limited news
-
11/12/08 Prosperity Minerals CEO buys 500,000 more shares
-
04/12/08 Prosperity Minerals CEO raises stake to 38.5%
-
03/12/08 Prosperity Minerals Sees Demand Slowdown In Current Financial Year
-
20/10/08 Prosperity Minerals warns on softening Chinese economy
-
04/09/08 Prosperity Minerals confirms 6.5 pence dividend payment
-
08/07/08 Prosperity Minerals results highlight solid progress