Chinese steel processor turns to Hong Kong for capital

Da Ming’s IPO comes as Chinese steel companies worry that government tightening measures aimed at the property market will erode steel demand.

Da Ming International, a privately owned stainless steel processor in China, has kicked off the bookbuilding for an initial public offering of between HK$500 million and HK$675 million ($64 million to $87 million) in Hong Kong. It plans to use the proceeds to expand its capacity and processing facilities.

Based in the Jiangsu province in eastern China, the company purchases stainless steel coils and plates from suppliers and processes them into different shapes and sizes according to its customers’ requirements. Its processing services include coil cutting, coil slitting, surface polishing, plate cutting and forming. The service helps end users to reduce their processing costs, Da Ming said in a preliminary IPO prospectus.

Da Ming made a net profit of $29 million in 2009, and $12 million in the first six months this year. It expects its 2010 profit to be at least $28 million.

Da Ming has a network of four processing centres in Wuxi, Hangzhou, Wuhan and Tianjin -- all of which are high industrial growth areas in China.

Chinese steel companies have had a tough year in 2010. The share prices of steel firms listed in both Hong Kong and Shanghai have fallen substantially amid growing worries that government tightening measures aimed at the Chinese property market will erode steel demand. Beijing’s order to limit power supplies to steelmakers in order to meet energy-consumption targets is also expected to squeeze steel companies’ profits.

Shares in Hong Kong-listed Angang Steel and Shanghai-listed Baoshan Iron and Steel, which is one of Da Ming's major suppliers, have tumbled 30% and 27%, respectively, so far this year. Hot-rolled coil, a benchmark product in China, fell 5.4% to an average Rmb4,188 ($632) a tonne in the third quarter from Rmb4,427 in the previous quarter, statistics show.

However, a key selling point for Da Ming is its unique business model as a processor as well as a distributor. It is the number one stainless steel distributor in terms of trading volume and in 2009 sold more than 5% of China's total stainless steel consumption that year. It has more than 6,000 customers from industries including machineries, petrochemicals, home hardware, automobile and transport, construction, and renewable energy. And its processing volumes are growing fast, sources said.

Da Ming has secured one cornerstone investor, Lee Kee Holdings, an investment holding company focusing on non-ferrous metals. It has agreed to purchase HK$30 million worth of shares in the IPO.

Da Ming is selling 25% of its enlarged share capital, or 250 million shares. All the shares are primary and are being offered at HK$2 to HK$2.70 apiece. The price range translates into a price-to-earnings (P/E) ratio of 6.2 to 8.4 times, based on forecast earnings for 2011. By comparison, Angang Steel is trading at 13 times and Baoshan at 8.5 times.

Some 90% of the shares will be offered to institutional investors, while the remaining 10% are earmarked for the Hong Kong public offering. The deal could stretch to between $74 million and $100 million if a 15% allocation option is fully exercised. 

Demand on the first day of bookbuilding was “very good” with lots of positive feedback from investors, according to sources.

The share price will be fixed on the night of November 22, and the listing is scheduled for December 1. CCB International and Deutsche Bank are running the deal.

This is Da Ming’s second attempt at a Hong Kong listing. The stainless steel distributor planned an IPO of up to $120 million in 2007. However, the company postponed the deal because it couldn't reach an agreement with its then bookrunner Nomura on the offering price.

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