China Steel completes GDR

The Taiwanese government sells a 2.58% stake.

Joint leads Citigroup and Goldman Sachs completed an accelerated GDR issue for China Steel Corp (CSC) last night (Thursday). The 11.98 million unit deal represents the first government sell down via a GDR since 1997 and before that 1992. Its emergence was somewhat unexpected given the escalating SAR's crisis in the Island Republic, although this did not appear to hamper demand for the transaction.

The issue raised $132.35 million via the sale of a 2.58% stake by the Stabilization Fund, which has now divested its entire stake in the 39.92% government-owned group.

Pricing was completed at the wide end of the indicative range and settled at NT$19.15, representing a 4.73% discount to the stock's NT$20.1 close. Year-to-date, the stock is up 3.61% compared to a 4.069% decline in the overall index. Twenty common shares equal one GDR.

The deal was completed on an accelerated basis, with the book opening at 4pm Hong Kong time and closing 1.25 times oversubscribed about five hours later. About 60 investors were said to have participated in the deal, with a rough geographic split, which saw 40% placed in Asia, 40% in Europe and 20% in the US. Most of the book were said to have been new investors to the stock.

From an investor's standpoint, observers say that the deal makes sense because China Steel is trading towards the bottom of its historic ranges. On an EV/EBITDA basis, for example, the company is currently trading at about four times 2003 earnings compared with a historic range of about four to ten times.

It is also said to be attractive relative to comparables in Taiwan and the global steel sector because it pays a high dividend yield. According to analysts' estimates, the group is trading on a net dividend yield of about 7% against 2003 earnings and 11% against 2004 earnings.

Founded in 1971, China Steel is the world's 16th largest steel producer and one of the most efficient, recording an operating margin of 23% for the 2002 Financial Year. The company is Taiwan's only integrated steel producer, although 28% of sales are exported, mainly to China and almost exclusively to Taiwanese firms operating on the Mainland.