AsiaPhos Limited

AsiaPhos Limited ("AsiaPhos" or the "Company") is offering 122m shares at $0.25 each of which 97.6m shares are new shares and 24.4m are vendor shares. 120m shares will be via Placement and 2m shares will be for the public. The link to the prospectus is here. The offer will close on 3 Oct at 12pm and the Company will be listed on Catalist. Based on the listing price of $0.25, the market cap of the Company is S$200m.

AsiaPhos is the first mineral resource company to be listed in SGX focused solely on exploring and mining of phosphate in the PRC with the ability to manufacture and produce phosphate-based chemical products. The Company currently own exploration and mining rights to two mines and a processing plant. Phosphate is a valuable and non-renewable natural resource and the main use of phosphate is to produce fertilizers.

An overview of AsiaPhos integrated strategy.

Financial Highlights

The Company has been profitable in the last two years where revenue increased from $4.5m to $4.9m but net profit fell from $2.9m to $1.2m. While the net margin last year was a decent 24.5%, it is surprising to see the Company turned in a loss for the first 3 months. This is somewhat surprising given the significant increase in mining production. However, the explanation given is that the low quality rocks are sold while the better quality rocks are kept as inventory for subsequent use in P4 processing. The results should improve this year as the plant has started processing.

It is good to see mining output production increasing strongly.

According to the prospectus, the NAV per share based on the enlarged share capital of 800m shares is 6.45 cents (versus the IPO price of 25 cents) and the listing PER is a whopping triple digit of  > 156x. Having said that, given that this is a resource company and its value lies in the reserves which it has, Historical PER is probably not a right metric to value this company.

Independent valuation

It is good to note that they have obtained an independent valuation for the assets at $269.8m, which is trying to give you comfort that the market cap is justified. The valuation methodology used is the Net Present Value of the forecast free cash flow produced by the assets. This is also known as the Discounted Cash Flow method. Please refer to Appendix K for the report but having said that, the assumptions used is critical and i am no expert in this field. The comfort however, is that they have used a very high discount rate of 14% which is probably right given the risk involved in mining and production.

Assuming the valuation range of $207.6m to $269.8m is right and without considering the other assets and liabilities, the NAV per share should be around $0.26 to $0.33, with further upside should market go crazy.

Use of Proceeds

The use of $24.4m proceeds is as stated below.

Shareholdings and Pre-IPO Investors

AsiaPhos will continue to be majority held by the Ong Family post IPO to the tune of 67.3%. Public investors will hold 15.3% of the Company.

There is a long list of pre-ipo investors and they are selling some shares at the IPO. The only 'comfort' if any, was that their entry price of $0.1875 was less than the usual 40%-50% discount to IPO price. They will add to the list of sellers when the moratorium expires.

However, the comfort i have is that the major shareholders are Singaporeans! ^_^ .... without saying too much, that adds a great deal of comfort.

Macro View

It is interesting to note that Morocco is a major supplier of phosphate to satisfy 80%-90% global demand till year 2030 and by 2100, many countries would have run out of reserves. According to the same article, China is becoming a net importer of phosphate and have imposed a 150% export tariffs on exports of phosphate.The article is here for your reference. There is another article on the demand and supply of phosphate in China and the article is here. If there is any one report which you should read from the prospectus, it will be in Appendix L: CRU Industry report. Go read it please.

It is interesting to note that the price of Phosphate has been trending downwards in the near term and was very volatile during 2008-2009 period. It will probably be bad for AsiaPhos should the price of phosphate collapse.

What i like about the company

• Sichuan is a resources rich region and the quality of the rocks are better (at least that is what the prospectus says)
• Lower operating costs in Western part of China
• It is a resource which is in constant demand.
• A Chinese mine owned by Singaporeans.

My Concerns

• Mines and plant are situated in Sichuan, which is very prone to major earthquakes in recent years.
• Unable to export outside of China due to punitive tariffs
• The quality of the board. I am not sure if there are enough diversity of independent views and experiences? The board of Directors comprises 2 non-executives, one is the daughter of and the other is the nephew of the CEO and the other 2 independent directors currently sit on the board of Sheng Shiong as well.
  
• Mining production capacity may not be as robust.
• Declining Phosphate prices
• Company has listed at least 5 major producer companies as competitors (Please refer to Chapters 4 and 5 in Appendix L)

My Valuation and Ratings

I have to tell you (once again) that i do not know how to value energy and resources companies. Too complicated for me and too many assumptions in the valuation methodology. However, having said that, my 'grapevine' said that this issue is hot even though i am not particularly impressed with the track record of Asiasons. I have also shared with you my valuation range of $0.26 to $0.33

Given the low price of $0.25, the well-received placement tranche and the fact that it is the first mineral resource company to be listed on SGX, I will  given it a 2 Chilli rating. However, given the small public float and the fact that  it is very difficult to get from the public tranche of 2m shares, it may not make sense for retail investors who apply for few lots.  

Happy IPOing and my intention is to hit and run.