China Steel GDR upsized to $743 million

Together with a 10% tranche of common shares sold to employees, the Taiwan steel manufacturer raises a total of $826 million.
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China Steel Corp is Taiwan's biggest steelmaker
<div style="text-align: left;"> China Steel Corp is Taiwan's biggest steelmaker </div>

China Steel Corp, Taiwan’s biggest steelmaker, has raised $743.5 million from a sale of global depositary receipts that was upsized by 8% due to good demand.

The deal was flagged through a regulatory filing in June and many investors had stopped buying the shares in the market while waiting for it to be launched. The share price had also come off after the stock went ex-dividend on Monday last week, but China Steel still chose to go ahead after it met with investors during a three-day roadshow last week. One source said the company was able to take advantage of a rotation out of technology stocks in Taiwan, which is prompting investors to look for alternative exposures.

The offering was launched after the Taiwan market closed on Tuesday and completed later that same evening. This allowed it to be marketed at a discount versus the latest close, as opposed to most other Taiwan GDRs that tend to bookbuild over a few days and against a live price. The fact that the management did some marketing with investors last week obviously facilitated the quick turnaround of the deal, as it allowed the bookrunners to ensure there was good anchor demand before launch. But China Steel is also familiar to many investors because of its size — it has a market capitalisation of almost $15 billion — and market position, and because it has outstanding GDRs already.

The deal initially comprised 35 million GDRs, which corresponded to 700 million Taiwan-listed shares. However, that was later upsized to 37.8 million GDRs, or 756 million shares. The price was indicated between $19.67 and $20.18, which translated into a 2% to 4.5% discount versus the closing price of its common shares in Taiwan.

While the deal was said to have been comfortably covered even after being upsized, the demand was price sensitive and the final price was fixed at the bottom of the range at $19.67 per GDR, or NT$28.32 per share. This resulted in a 4.5% discount versus the NT$19.65 close.

Alongside the GDR issue, China Steel was also selling 84 million common shares to its employees, resulting in a total issue of 840 million new shares — the maximum it was allowed to sell as per its regulatory approval. This means the total offering amounted to $826.1 million — making it the largest Taiwan equity offering since October 2007 when Innolux Display Corp sold  $1.35 billion of GDRs (this is the case even if the 10% employee portion is excluded.) The final size accounted for 5.9% of the existing share capital and about 20 days’ worth of trading.

The proceeds will be used to buy raw materials overseas and to support its capital-intensive business.

According to sources, the order book was very hedge fund-biased, but also included some Taiwan specialist long-only funds that saw value in the name after the recent share price decline. About 50 investors participated in the trade.

While China Steel is facing the same macroeconomic headwinds as other cyclical companies at the moment — although less so than the tech sector — investors like the company because of its high dividends. When the stock went ex-dividend on July 18, the share price needed to adjust not just for a regular cash dividend of NT$1.90 per share, but also for a 5% stock dividend.

The market also reacted positively to the fact that the overhang of this sale has now been removed and the share price gained 1.5% yesterday to NT$30.10.

That said, even after a 10.2% drop since July 18, China Steel isn’t a cheap stock. In fact, it is trading significantly above its sector peers in the region, both on a price-to-book basis and with regard to its enterprise value-to-Ebitda multiple. As of Monday this week, China Steel’s EV/Ebitda multiple for 2011 stood at 14.9 times, while larger peers Posco in South Korea and Nippon Steel in Japan were quoted at multiples of 8.3 and 8.1 times respectively. On a 2011 price-to-earnings basis, Nippon Steel is quoted at 16.2 times; slightly higher than China Steel at 14.1 times. Posco is trading at 9.5 times.

The deal was led by Credit Suisse and J.P. Morgan.

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