Shanghai Industrial sells remaining non-core assets

By exiting stakes in Bright Dairy and SMIC, the red-chip conglomerate can focus on acquisitions for its core businesses.

Hong Kong-listed red-chip conglomerate Shanghai Industrial Holdings (SIH) has sold its remaining non-core investments: a 30.17% stake in Bright Dairy and an 8.2% holding in Semiconductor Manufacturing International Corporation (SMIC), raising a total of $368 million.

SIH is selling the stake in Bright Dairy -- one of China's largest dairies -- to Bright Food Group, the milk-producer's largest shareholder, for Rmb1.55 billion ($226 million). The price corresponds to Rmb4.93 per share, or a 37% discount to the last closing price before the announcement late on Monday. The low price is justified by a lock-up period: of the 30% stake, 5% cannot be traded on the Shanghai Exchange until October and the remaining 25% cannot be traded until October next year. Despite this, SIH will book a gain before tax of $122 million from the sale.

This is offset, however, by a net loss of $108 million on the sale of 1.8 billion SMIC shares, even though the selling price of HK$0.60 per share represented a 38% premium to Monday's closing price. The sale of the 8.2% stake bought in a total of HK$1.1 billion ($142 million).

SMIC has been something of a loss maker in recent years. In 2008 it made a loss of $28.3 million, which was significantly worse than the $3.6 million loss in 2007. SIH is selling the SMIC stake to its holding company, Shanghai Industrial Investment Holdings (SIIH).

If SMIC's second quarter report, released yesterday, is anything to go by, SIH may have been wise to leave the company. Although revenue was up by 82.5% in the past three months to $267.4 million, the loss attributable to shareholders was still $98.1 million.

The sales of Bright Dairy and SMIC are the latest in a string of divestments of non-core assets by SIH, which have raised a total of $486 million. At the end of June, the company sold its 18.9% stake in medical equipment manufacturer, MicroPort Medical, to Shanghai Zhangjiang Hi-Tech Park for $66 million. Earlier in the year, it offloaded its stake in the Lianhua supermarket chain.

SIH is offloading its non-core holdings as part of an exercise to streamline its business structure. With the money raised, the company will undertake a series of acquisitions, according to a written statement. One project has already been announced: last month, SIH agreed to buy a luxury residential project in Shanghai Bay for an outlay of $292 million, an investment that is expected to bring in $52 million of revenue annually. The company has also said that it has identified a toll road in Shanghai that it could purchase.

But SIH's main focus will probably be to increase its land bank. A research report published yesterday by Nomura said that land acquisitions shall be the "next catalyst" for improving net asset value.

"Any developers purchasing land bank this year should see margin protection moving into 2011 and beyond. We believe that SIH is likely to be one of the winners given its strong balance sheet and government connections to acquire land bank at reasonable prices," the report said.
The latest sales were also a good way to exit companies where SIH lacked a majority stake. In its other businesses -- within the four main areas of infrastructure, medicine, consumer products and real estate -- the conglomerate is the majority shareholder. Now that Bright Dairy and SMIC are no longer part of its portfolio, SIH controls all the companies that it has an interest in.

¬ Haymarket Media Limited. All rights reserved.
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