South Korea’s Hanwha Chemical has launched roadshows for a 21.4 million global depository receipt (GDR) sale that could fetch up to $395 million. The group is offering up to 13.2% of its share capital via a primary share deal, with one GDR unit equal to one share.
The GDRs will be listed in Singapore, according to a term sheet, with the issuer subject to a 90-day lock-up. Pricing is expected on April 23 under the lead of Citi and Goldman Sachs.
The deal is being driven by a desire to pay down loans resulting from a string of acquisitions, which have pushed the group’s debt-to-equity ratio up to 123.7%. But it should also considerably expand Hanwha Chemical’s foreign ownership level from the current 14% -- low relative to domestic peers Lotte Chemical Corp and LG Chem, which are 26% and 33% foreign-owned, respectively.
The group currently has a free-float representing 54.6% of its total outstanding shares and its new share issue represents about 20 days of its recent trading volume.
The stock has unsurprisingly been subject to selling pressure in the run up to the formal GDR roadshow, losing 7% in the last four trading sessions compared with the Kospi Index's 0.3% decline. The shares year-to-date are down 14%.
Where are the comparables trading?
Hanwha Chemical is trading at a premium to most of its peers on a price-to-earnings basis, at 16.2 times forward earnings, according to Bloomberg.
Sources close to the deal say the closest comparables in terms of size are Lotte Chemical Corp and Kumho Petro Chemical, also listed in South Korea. Lotte's shares are currently trading at 11.54 times forward earnings and have lost 18% year-to-date, while Kumho is at 19.17 times, slipping 3% over the same period.
However, on a price-to-book basis, Hanwha is one of the cheapest listed chemicals stocks in Asia and one of only a handful trading below book value. At 0.6 times estimated 2014 book, the group stands at the other end of the scale to Petronas Chemicals on 2.2 times and LG Chem on 1.4 times, according to analysts at one European bank.
Analysts say this low valuation is driven by Hanwha’s equally low return on equity (ROE) – 6% compared with 13% for LG Chem and 16% for Petronas Chemicals. Lotte Chemical is valued at similar levels, with an estimated 2014 price-to-book value of 0.9 times and ROE of 6%.
Releasing its year-end results for 2013, Hanwha guided investors to expect weakness in its chemicals earnings over the short-term but an improvement over the medium-term.
Solar power
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.
To help boost its finances and focus on the company’s core business – that is, chemicals and solar – Hanwha Chemical is looking to offload its pharmaceuticals arm DreamPharma. According to local press, Hanwha has mandated Citi to help it sell the drug producer, which reported a net loss in 2013.
Slowing Chinese demand has hit South Korean chemical companies, especially those reliant on petrochemicals, leading to inventory pileups and decreasing prices.
As such KDB Daewoo Securities anticipates a slow recovery at best for the likes of Kumho Petrochemical, Lotte Chemical and LG Chem.
However, the outlook for the photovoltaic sector – which Hanwha Chemical specialises in – is seen by analysts as relatively brighter.
China’s administration feels a greater urgency to reduce its reliance on oil. And recent energy policies indicate that the production of solar panels – along with other sources of alternative energy – will increase substantially as the mainland attempts to wean itself off oil.
This may benefit companies such as Hanwha, which operates a fully integrated photovoltaic segment, from silicon ingot production all the way down to the design, development and manufacturing of wafers, solar cells and solar modules.
KDB Daewoo Securities notes that solar photovoltaic and ethylene-based chemical prices have been rebounding after bottoming out in 2012 and 2013, although cautions that overcapacity in solar modules may led to a slower pickup for Hanwha.
