Hanwha raises $340 million in GDR sale

The South Korean chemical and solar company will use the money raised to reduce its debt. Investors were keen to buy shares at the discount offered, particularly hedge funds.

Hanwha Chemical has raised $340 million after pricing its global depository receipts (GDRs) at a discount on Thursday morning.

The South Korean group, which specializes in chemical products and materials for use in the solar power industry, priced 21.7 million GDRs at $15.70 per share (16,322 won), an 8.3% discount to the April 23 closing price of 17,800 won.

Initially there were between 19 million and 21.4 million GDRs on offer, with one GDR equal to one share. The issuer is subject to a 90-day lockup.

Citi and Goldman Sachs were lead book runners.

The institutional book was roughly 2 to 3 times oversubscribed, with more than 40 long-only institutional investors and hedge funds participating in the deal. It was a concentrated book - the top five investors accounted for 50% of the deal. Although the book was mixed, it was “a bit hedge fund heavy”, one banker noted.

In addition to helping pay off debt – Hanwha's debt-to-equity ratio stands at 123.7% after a slew of acquisitions – the GDR sale also allows the company to boost its foreign ownership, which previously stood at 14%. This is low compared to domestic peers Lotte Chemical Corp and LG Chem, which are 26% and 33% foreign-owned, respectively. Roughly 89% of the investors in the GDR sale are Asian, with the remainder split between the US and Europe.

It's not uncommon for companies predominately owned by domestic investors to offer shares at a discount as a way to attract more foreign ownership. And while the future for the solar industry is promising, it remains a risky sector. Discounts make the company look more enticing.

“Solar is mixed. It's a really volatile space. And [sometimes], getting people tremendously interested in solar can be hard,” one banker close to the deal said. “But the story is there. There's a lot of positive speculation in solar, and [Hanwha] is looking to expand. Plus, [investors] are quite comfortable with its other core businesses, and expect [the company] to improve its balance sheet quite a bit.”

Performance

A combination of slumping demand in China and volatile markets have hurt Hanwha Chemical’s results.

The company reported net losses for the past two financial years – 112 billion won in 2012 and 83 billion won in 2013. But it expects a turnaround in 2014 driven by shrinking losses in its solar business, which dropped from 25 billion won in the third quarter to 17.2 billion won in the fourth.

Hanwha’s short-term and long-term borrowings totalled 5.514 trillion won ($5.3 billion) as of December 31, with the company spending 992 billion won ($953.1 million) in 2011; 872 billion won ($837.8 million) in 2012 and 672 billion won ($645.6 million) in 2013.

Recent acquisitions also added to the debt load: it acquired Hanwha SolarOne in 2010 and Hanwha Q Cells in 2012; both were attempts by the company to expand further in the solar industry.

To help boost its finances and focus on the company’s core business – chemical and solar – Hanwha Chemical is looking to offload DreamPharma, a pharmaceuticals company. DreamPharma sales halved from more than 170 billion won in 2009 to 85.5 billion won in 2012.

Hanwha is also considering divesting from its construction materials unit.

Comparables

One of the company’s closest comparables is locally-listed Lotte Chemical, which has seen its shares drop 18% so far this year. It is currently trading at a forward 2014 p/e of 11.26 times.

Another peer is Kumho Petrochemical, also listed in Korea, which is down 1% year-to-date and trading at a forward p/e of 19.68 times.

Hanhwa, meanwhile, is down 15% this year and trading at a forward p/e of 14.97 times, according to Bloomberg.

On a price-to-book basis, however, Hanwha is cheap compared to its peers, currently trading at 0.71 times the estimated 2014 book, while Lotte is at 0.96 times and Kumho’s 1.96 times.

Investors may also look at SolarOne as a comparable, which has had extremely volatile performance since Hanwha purchased it.

Just one month after the August 2010 acquisition, SolarOne shares peaked at $12.45. They then spent much of 2011 in decline, bottoming out at $1.07 in January 2012. They hovered around the $1 mark until July 2013, and closed at $2.84 on April 23.

Industry outlook

The slowdown in China has hit a number of industries, and Korean chemical companies are no exception. Less demand for chemical products leads to inventory pileups and decreasing prices. And China’s slowdown has hit companies reliant on petrochemicals harder, which includes Kumho Petrochemical, Lotte Chemical and LG Chemicals. KDB Daewoo Securities expects excess capacity and sluggish demand will weigh down on a half recovery for these three companies.

Despite some bearish forecasts, the outlook for the photovoltaic sector – which Hanwha Chemical specialises in – is reasonably bright, with analysts pointing to the business restructuring in China and rising polysilicon prices.
China’s government feels a greater urgency to reduce its reliance on oil, and recent energy policies indicate that production of solar panels – among others – will increase substantially.

This may benefit companies such as Hanwha, which operates a vertically integrated photovoltaic segment, from upstream silicon ingot production to the downstream segment of designing, developing and manufacturing wafers, solar cells and solar modules.

KDB Daewoo Securities notes that solar PV and ethylene-based chemicals have been rebounding after bottoming out in 2012 and 2013, although it cautions that overcapacity in solar modules may lead to a slow recovery for Hanwha.

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