China Hongqiao Group, one of the country’s largest aluminium producers, raised $220 million in an accelerated share placement to pay down debt and acquire more upstream assets.
The Shandong province-based company on Thursday sold 275.9 million shares at HK$6.19 per share, a 9.1% discount to the September 3 close of HK$6.81, according to a term sheet seen by FinanceAsia.
It was the bottom of the initial range of HK$6.19 and HK$6.36 per unit, which represented a 6.6% to 9.1% discount to its September 3 close.
Books were covered a few hours after the China Hongqiao deal launched in Hong Kong thanks to broad-based investor interest, according to one source close to the deal. Existing shareholders, long-only institutional investors and hedge funds placed the majority of the orders.
However, despite being covered early, the deal did not price until later in the global day. “The company wants to let US and UK shareholders take a look as well,” the source told FinanceAsia.
Over 60 investors participated in the deal, with the bulk of the book made up of Asian investors, a second source said, noting that there was also some US and European investors as well. The top 10 investors made up between 60-70% of the book.
Although the demand was not sufficient enough to exercise the full upsize option of 62.6 million shares, there was enough to increase the deal size by 10% and bring the total amount raised to $220 million, the second source added.
The 250.4 million shares initially offered represent 4.2% of China Hongqiao's $5 billion market capitalisation. Bank of America Merrill Lynch was the sole bookrunner.
Financials
Revenues at China Hongqiao rose 19% year-on-year in 2013 to Rmb29.4 billion ($4.8 billion) while net profits totaled Rmb5.6 billion compared with Rmb5.5 billion in 2012.
The company also reported encouraging first-half results in August, with sales climbing 23% year-on-year to Rmb36.2 million in the first six months of 2014.
China Hongqiao's recent share price performance has been impressive. Shares in the aluminium producer have jumped 28% so far this year and it’s currently trading at 5.98 times its expected 2014 earnings.
Shares in national rival Aluminium Corp of China, also known as Chalco, have risen about 36% over the same period, reflecting a positive trend for aluminium producers globally as aluminium prices continue to rise. Three-month LME aluminium closed September 4 at $2,079 per tonne, a 15% increase from $1,800 per tonne at the start of the year.
Still, rising upstream costs has led China Hongqiao to pile on the debt, with liabilities surging 74% to Rmb38.3 billion at the end of 2013 compared with a year earlier, according to the company’s financial statement. So the company aims to use some of the proceeds from its follow-on share offering to repay some of this debt.
China Hongqiao, which produces aluminium alloys and ingots and offers cast rolling and busbar production, will also use the proceeds to acquire bauxite refineries. Bauxite is an aluminium ore that is strip-mined and processed into alumina, which is later smelted into aluminium.
The company’s upstream costs have risen steadily this year, largely due to a January 2014 export ban in Indonesia on 65 different raw materials, including bauxite. In addition to increasing China Hongqiao's transportation costs, Indonesia’s export ban has pushed global bauxite prices up.
In an effort to curb these rising costs, Hongqiao will look to acquire a number of its own bauxite refineries in the region, having already diversified some its bauxite supply sources away from Indonesia and secured new fixed-price contracts in Australia, India and the Solomon Islands.
The source close to the deal declined to offer a timeline for any potential purchases or say how many refineries the company plans on acquiring.
Overcapacity
Analysts maintain the company’s integrated model will help future performance. China Hongqiao has a larger profit margin than its peers because it charges customers a premium for its value-added products. It also operates its own power plant, which provides 60% of the company’s power needs and reduces production costs significantly.
That said, China Hongqiao is not immune to China's overcapacity problems. Aluminium smelters globally, with a significant number located in China, were set to shut about 2 million tonnes of capacity prior to this year's aluminium price rally. Beijing has tried to curb overcapacity problems for years but has not been successful as local governments continue to offer subsides to keep the smelters running to provide revenues and protect jobs.
China’s new leadership has made tackling industrial overcapacity a priority and has prohibited local governments from offering financial support. While analysts say this should lead to some smelters going bankrupt, this is unlikely to happen because this could expose banks to large debts and risk a crash.
Recovering aluminium prices will likely lead to smelter restarts in China. Although some 2 million tonnes of aluminium smelting production was set to be taken offline in the first half of the year, new projects are forecast to add 3.9 million tonnes in the second half, with more than half of the supply coming from China’s north-western Xinjiang province alone.
China Hongqiao raised $822 million in a Hong Kong IPO in March 2011 having initially sought to raise as much as $2.2 billion. Falling aluminium prices and weak market conditions led the issuer to scrap the deal and return with a more modest offering just over a month later.
Even then, the deal was only pushed across the finish line after four cornerstone investors invested $350 million. Developers Cheung Kong and Chow Tai Fook, controlled by Hong Kong tycoon Cheng Yu-tung, each pledged $100 million. Thomas Lau, managing director of shopping mall operator Lifestyle International Holdings, and his brother, Joseph Lau, chairman of Chinese Estates, each agreed to buy $75 million worth of shares.
