Jinxi Steel shortlists banks for IPO

The company hopes to become the fourth Chinese steel producer to list on the Hong Kong Stock Exchange.

One of China's new, aggressive, privately-owned steel companies is hoping to list on the HKSE by the end of the year. And in what is believed to mark a first for the exchange, Jinxi Steel will rank as the only former SOE (State Owned Enterprise), which has been subject to an MBO (Management Buy-Out).

The company is said to be targeting a late third quarter/early fourth quarter launch date and is hoping to raise up to $200 million. It is believed to have shortlisted four investment banks - BNP Paribas Peregrine, Credit Suisse First Boston, HSBC and JPMorgan. One will be picked.

Privately-owned steel mills are increasingly coming to the forefront on the Mainland where the industry has been transformed from Communist era methods of production to become one of the most efficient worldwide. Analysts estimate that the cost of production in China is now 60% less than developed countries such as the US, which sparked a global steel war in early 2002 when it raised tariffs to protect its domestic industry.

Jinxi is said to run extremely high EBITDA margins by domestic standards (around 25%) and less than half its client list comprise SOEs. It is also situated right next to its ore supplies and operates at the high end of the Chinese steel industry, where margins are most resilient and growth strongest.

And as Bank of China analyst Oiver Du wrote in a recent research report, "With the Chinese government's industry protection measures, robust growth in fixed asset investments and downstream industries, domestic steel demand is expected to stay strong."

But analysts see divergent performance between Mainland steel producers. Some also worry that huge increases in supply particularly from privately-owned mills will burst what is increasingly being viewed as a price bubble. As Du adds, "Large-scale steelmakers steadily expanding into high-end product segments are poised to become world class players, while smaller ones with low-end product mixes will likely be eliminated."

The Chinese market is currently characterized by extreme fragmentation. The country now produces more steel than any other around the globe (170 million tonnes per year) and has an approximately 18% market share compared to 12% for Japan and 11% for the US. However, only two companies control 20% of the market - Baosteel and Angang New Steel.

Angang, which is viewed as one of the main beneficiaries of a move towards high-end products, has performed well so far this year. The stock closed Friday at HK$1.38, up 23.21% on the year, compared to a 10.25% increase in the H-share index.