Morgan Stanley exits Shanshui Cement

Morgan Stanley's private equity unit sells its remaining 8.8% stake in the Chinese cement producer for $222 million.
A worker delivers bags of cement to a Chinese factory.
A worker delivers bags of cement to a Chinese factory.

Morgan Stanley has sold a HK$1.73 billion ($222 million) block in China Shanshui Cement, taking advantage of a recent rally in the Chinese cement producer's share price. The transaction cleared the last batch of Shanshui shares held by the US bank, which invested in the company before its IPO in 2008 and has made numerous sell-downs since April 2009.

The shares were held by a fund owned by Morgan Stanley's private equity unit, MSPE. The fund sold 246.7 million shares, representing 8.8% of Shanshui's issued share capital, at a price of HK$7.01 apiece. The sale, which was completed through an accelerated deal after the Hong Kong market closed on Thursday, accounted for 15 days’ worth of trading volume. Morgan Stanley was the sole bookrunner.

The final price represents a 3.4% discount to Thursday's closing price of HK$7.26, and was within 6% of the stock's all-time high of HK$7.44. The transaction came on the back of a 7% rally in Shanshui's share price after the company announced good 2010 results on March 25 and, at the time of the deal, the stock was up 31% year-to-date.

The company, which is based in Shandong province in eastern China, posted a net profit of Rmb979 million ($149 million) for 2010, up 39.6% from the previous year. Basic earnings per share were Rmb0.35 last year, representing an increase of 40% from 2009.

The transaction, like MSPE's previous sell-downs in Shanshui Cement, didn't dampen the enthusiasm among other investors for the stock, which closed 1.9% higher at HK$7.40 on Friday. Each of MSPE's sales has been done at a higher price than the previous one.

In April 2009, MSPE and fellow pre-IPO investor CDH China Fund offloaded 265 million shares at HK$3.78 apiece, raising $129 million. And, on the back of a 25% gain in the share price in the following three months, MSPE shed another $80 million worth of shares in July that year at a price of HK$4.96 per share.

Further gains lured MSPE and CDH to divest a further $170 million in September 2009. The two firms sold 240 million shares, of which 180 million came from MSPE, at HK$5.50 apiece. That deal left Morgan Stanley with the 8.8% stake that it sold on Thursday.

Shanshui is currently trading at a price-to-earnings (P/E) ratio of 17.9 times, significantly lower than the other two big-name cement players in China. China Resources Cement is quoted at a P/E multiple of 24.6 times and Anhui Conch Cement at 23 times. However, Hong Kong-listed Asia Cement (China), the mainland Chinese arm of Taiwan's Asia Cement, is trading at 12.6 times.

Shanshui listed in Hong Kong in July 2008 after a $234 million IPO, in which the company sold a 25% stake at HK$2.80 per share. Morgan Stanley and Credit Suisse were joint bookrunners of the deal.

In recent years, China has ordered the closure of outdated vertical kilns, widely used by small, rural cement producers, to cut pollution and improve energy efficiency. This has become an opportunity for bigger players like Shanshui, which has actively taken part in the market consolidation, both through organic growth and acquisitions in northeast China.

In 2010, a total of 91.55 million tonnes of obsolete cement production capacity was eliminated, and in the past five years, an accumulated amount of 434 million tonnes of obsolete clinker production capacity has been closed down, according to a Shanshui statement.

Driven by increasing demand for cement in combination with a slowdown in new production capacity and the elimination of a large number of obsolete cement plants, cement prices have been picking up in industry-intensive areas in some provinces, including Shandong, resulting in higher profit margins for some of China's leading cement companies, Shanshui said.

Photo provided by AFP.

¬ Haymarket Media Limited. All rights reserved.