Jinxi Steel prepares for IPO

Steel manufacturer pushes back flotation a few months to the first quarter of 2004.

Jinxi Steel has mandated JPMorgan and Merrill Lynch for an IPO on the Hong Kong Stock Exchange, which is now expected to surface at the beginning of 2004. The company had originally been pushing for a late third quarter/early fourth quarter listing, but a combination of SAR's and due diligence always taking longer than expected, has pushed the timetable back.

Because restrictions on the movement of migrant workers affected production at the company's steel mills and hence first half profitability, analysts say Jinxi will have to work hard to achieve its $80 million to $100 million net profit forecasts for 2003. It had originally been hoping to raise about $250 million and achieve a market capitalization of about $1 billion.

At the time the deal was mandated earlier in the summer, the company was hoping to price flat to the level of comparables such as Angang New Steel. The H-share listed stock has, however, climbed 114% so far this year, far surpassing the equally strong performance of the H-share index, up 55% year-to-date.

As a result, P/E ratios for the steel sector have expanded from eight times to 12 times forward earnings in the space of just a couple of months.

Steel specialists believe Jinxi deserves a premium because it is privately-owned and should become the first former State Owned Enterprise to achieve a Management Buy Out and list on an overseas exchange. Its MBO status means that it has been able to achieve a number of cash flow generative efficiencies that many of its competitors lack.

Like most Chinese steel companies it is also hoping to rapidly expand output, doubling production from two to four million metric tons in the space of the year.

In the middle of August, the State Development and Reform Commission warned that increased steel production might create a supply glut. Domestic demand for steel is said to be growing by about 10% per annum and China remains a net importer.

However, Xinhua has reported that China's largest 40 steel makers plan to expand capacity by nearly 40% over the next two-and-a-half years to 142 million metric tons. BaoSteel is currently the largest producer on 11 million tons and Angang second on just over 10 million. The rest of the market is characterized by fragmentation.