Key Takeaways:
- LB Group has filed for a Hong Kong IPO to raise up to $1.5 billion, aiming to consolidate its place as Asia’s leading producer of titanium dioxide pigments
- Listing would complement company’s existing Shenzhen A-shares, which look sharply undervalued compared with industry peers
By Andrew Curran
Asia’s top producer of titanium oxide, a powder used to whiten everything from paints to inks and plastics, is hoping a new Hong Kong listing can also brighten its market value and raise it some cash to consolidate its market-leading position.
Those are the big messages coming from LB Group Co. Ltd., which filed last week for a Hong Kong IPO underwritten by CICC, CMB International, Guotai Junan, and GF Capital. The offering hopes to raise up to $1.5 billion, according to media reports citing unnamed sources. LB Group’s story may not be as sexy as miners of exotic minerals like cobalt and nickel, which have exploded lately in both popularity and price as primary components for electric car batteries.
But like many other commodities, the titanium dioxide that is LB Group’s bread and butter has seen price gains lately, albeit not quite as big as the hottest commodities. The company also derives all of its product from mines in its home China market, sharply lowering the risk that many of its peers face from reliance on overseas mines.
The overall picture is a relatively compelling growth story, even though investors in the company’s Shenzhen-listed A-shares have given the company the relative cold shoulder compared with similar miners.
Known as Lomon Billions until July 2021, LB Group plans to use the money from the IPO to fund an expansion of its production capacities, contribute to working capital, and cover general corporate expenses, according to the prospectus filed in Hong Kong last Tuesday.
Listed in Shenzhen since 2011, the company reported a net profit of almost 4.8 billion yuan ($753 million) in 2021, more than double its 2020 figure, though that growth is expected to slow considerably to about 12% this year. It attributed last year’s stellar growth to higher titanium dioxide prices and bigger volumes sold, which led to a nearly 50% rise in 2021 revenue to 20.6 billion yuan. The company’s current market capitalization stands at nearly 50 billion yuan, based on its Shenzhen listing.
At the end of 2020, LB Group was producing 11.4% of the world’s titanium dioxide pigments and 23.4% of China’s output. The company has majority equity interests in three mines in China, two operational and one under development, including one in southwestern Sichuan province producing ilmenite, the top source of titanium ore and the number one source of titanium dioxide.
Titanium dioxide is a fine, white powder that provides whiteness and brightness in paints, inks, plastics, and paper. China is a top producer of the relatively common metal, which is non-toxic, non-reactive, highly refractive and UV-resistant, giving the product multiple applications beyond the materials it is often used to color. The compound is also used as a color and texture enhancer in food, and as a pigment and thickener in cosmetics and sunscreens.
In addition to titanium dioxide, LB Group also makes and sells by-products from its mines and production processes, including iron ore concentrates, iron compounds, pig iron, and titanium tetrachloride. Like its mines, a majority of LB Group’s customers – nearly two-thirds – are in China, most of those large-scale distributors. Another 17.5% are located elsewhere in Asia, and 10% are in Europe.
Modest price increases
The price of titanium climbed around 5% last year on a combination of strong demand coupled with slowing production and supply chain issues linked to the global pandemic. The price has largely stabilized since January, and the metal now sells for around 1,770 yuan per metric ton.
Working from its solid base, LB Group now wants to capitalize on its vertically integrated business model and strong demand to increase its market share. A second listing in Hong Kong works in that direction, raising more money and also giving global investors a chance to buy into the company’s growth story.
Despite its strong position, investors weren’t impressed with announcement of the latest listing plan. LB Group’s Shenzhen-listed shares fell 9% the day of the announcement, and have continued to slump since then. The stock has also fallen over the past year, dropping to its current levels of around 21 yuan after reaching a 12-month high of nearly 39 yuan last September.
The company’s price-to-earnings (P/E) ratio now stands at about 10, which looks like relatively cheap compared to other Chinese metals manufacturers, whose industry average stands at a far higher ratio of about 27. The company’s competitors include Pangang Group Vanadium Titanium and Resources (000269.SZ), whose P/E also stands at a far higher 27, and the financially troubled and lowly valued Chongqing Iron and Steel (1053.HK; 601005.SH). Offshore competitors include Rio Tinto (NYSE:RIO) and Tronox (NYSE:TROX), as well as several major India-based companies.
LB Group regularly pays dividends, including 2.6 billion yuan paid at the end of last year, constituting a 54% payout ratio. While its dividends have been volatile over the last decade, they have also grown on a broader basis.
Given LB Group’s excellent earnings growth, and history of growth and paying dividends, an observer might conclude its shares are now quite undervalued, and a Hong Kong listing could represent a good opportunity for investors with a healthy appetite for risk. Some analysts have yuan price targets in the mid-40 yuan range for LB Group’s shares – roughly twice its current level.
The company’s strong capabilities through the entire titanium industry chain give it a serious competitive advantage in a relatively concentrated market. The company said in its IPO application that over the short- to medium-term it wanted to consolidate its market position and improve the self-sufficiency rate of its raw materials, among its goals intended to solidify its position.
It said it would use funds raised from the listing to increase production capacity at its existing mines and construct additional production lines in multiple regions. Also on the radar are new production lines to diversify its portfolio into titanium alloys, lithium iron phosphate, graphite anode material and iron phosphate. The IPO document includes future annual production targets such as 30,000 tons of advanced titanium alloy, 20,000 tons of battery material-grade iron phosphate and 20,000 tons of lithium-ion battery material.
With ongoing supply chain and geopolitical issues constraining the import of some metals and minerals into China, as well as rising prices for base metals worldwide, and a white-hot market for rare earths and minerals, LB Group has the potential to richly reward shareholders. The company may just need to find the right audience for its story, which could come from the global investors likely to buy into its upcoming Hong Kong IPO.
