Shougang sold 800 million shares, or 13.2% of its existing issued share capital, at HK$2.26 per share. The price was fixed at the top of an indicative range starting from HK$2.14, and represents a discount of 8.1% to the HK$2.46 closing price at yesterdayÆs morning session. The shares were suspended in the afternoon to carry out the placement, but were set to resume trading today.
The share price rallied 6.5% in the morning before the deal, however, and based on the previous dayÆs closing price of HK$2.31, the discount was a much tighter 2.2%. JPMorgan was the sole bookrunner and underwriter of the deal.
The offering attracted about 60 investors and was well oversubscribed with no price sensitivity, according to a source. The demand came predominantly from Asia and included many traditional long-only Hong Kong and China funds.
ôThe whole sector has had a very good run recently on the back of steel prices and if you look at the sector in general, itÆs in a good momentum,ö says the source with regard to why investors came into the deal. ôI think people believe the use of proceeds is justified, and that the amount raised is justified.ö
Of the net proceeds, HK$600 million will be used for product quality improvement and as additional capital expenditure for the companyÆs Qinhuangdao Shouqin plant. Around HK$153 million will be injected into the plant for deep processing facilities of plates, while the rest will go towards general working capital and a further expansion of the Shouqin plant.
ôWe have seen some price gains for Angang and Maanshan Iron in the past two days, but on average Chinese steel companies are trading in a range of 11 to 15 times earnings. A premium is deserved if the proceeds of the placement are used for favourable expansion projects or mergers and acquisitions,ö says an analyst covering the steel sector.
The placement price values Shougang at 11 to 12 times its 2007 earnings, according to the source.
The offering was brought to market after a substantial rally in the Hong Kong-listed steel makers. Angang Steel Company surged 20% on Tuesday (July 24) following a 6% gain on Monday. It added a further 1.6% yesterday to close at a record high of HK22.20. Maanshan Iron & Steel Company also reached a new record close of HK$7.09 after gaining a combined 14.7% over the past three days.
ôWe expect steel prices will go up 5% in the second half on a year-on-year basis,ö says the analyst. ôThere was a recovery in steel prices in the first half, although there wasnÆt any substantial upside. But we believe demand will increase steadily in the second half.ö
Steel manufacturing is the core business of Shougang and accounted for 70% of turnover in 2006. Early this year, the company introduced Hyundai Heavy Industries as a strategic partner and sold a minority stake in its steel manufacturing business to the Korean shipbuilding giant.
The company isnÆt a pure steelmaker, however, as it also runs shipping operations and a majority-owned power plant. In addition, it produces steel cord for radial tyres, processes and trades copper and brass products, trades steel products and manufactures and installs kitchen and laundry equipment.
The sale was done through a top-up placement that saw the controlling shareholder, Shougang Holding, sell existing shares before subscribing to the same amount of new stock at the same price. As a result of the sale, Shougang HoldingÆs interest in the company will fall to 39.7% from 44.9%. The stake it holds together with its concerted partner, Cheung Kong (Holdings), will drop below the 50% mark to 46.3%. Before the placement the pair held a combined 52.4%.
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