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China Metallurgical shares drop in Hong Kong debut
Published on: 2009-09-24
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Sept. 24 (Bloomberg) -- Metallurgical Corporation of China Ltd. fell 11 percent on its first day of trading in Hong Kong, the city’s weakest debut this year, on concern government efforts to curb industrial overcapacity may restrict profit growth.

The state-owned construction company dropped to HK$5.64 at 2:42 p.m. local time from the HK$6.35 offer price, after raising HK$18.2 billion ($2.3 billion) in Hong Kong’s biggest initial public offering for 18 months.

China Metallurgical, which builds steel mills and helped construct Beijing’s “Bird’s Nest” Olympic stadium, sold shares at the lower end of its indicated range after China’s cabinet said it would rein in oversupply of steel and cement. The company will use the proceeds to expand its mine building business overseas.

“Some investors are concerned about oversupply in China’s steel industry as the company has business in that sector,” said Carmen Wong, an analyst at Phillip Securities Group in Hong Kong. “Market sentiment for this stock isn’t positive.”

The stock tracked a 13 percent decline in the company’s Shanghai-traded shares since their Sept. 21 debut. The company has built plants for Baosteel Group Corp., the country’s largest mill, and Handan Iron & Steel Group, according to its offer document.

The Hong Kong IPO pricing of HK$6.35 was 16.9 times forecast earnings, compared with 15.7 percent for the Hang Seng China Enterprises Index. The IPO was offered in a range between HK$6.16 and HK$6.81.

Investors in Hong Kong applied for 205 times the stock available compared with an oversubscription rate of almost 600 times for Sinopharm Group Co., China’s biggest drug distributor, which rose 16 percent on its debut yesterday.

Rising Output

Steel output jumped to a record in August, with the higher supply spurring a 20 percent decline in benchmark Chinese steel prices from this year’s record on Aug. 4. The country is the world’s largest steel producer, accounting for half of global output.

China’s steel production will rise 6 percent to 530 million metric tons this year as demand increases, according to the Ministry of Industry and Information Technology.

“China is producing more steel than they need and it could take two to three years before this is resolved,” said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong.

Some Chinese mills have cut production this month as prices and profit dropped, Zhang Fenghua, export manager at Tangshan Iron & Steel Group, said on Sept. 18.

Bubble Burst

The last company to drop on its first day of trading in Hong Kong was Sundart International Holdings Ltd., which fell 6.7 percent on Aug. 21. Companies listing in Hong Kong have raised HK$58.4 billion in 2009.

“The bubble for IPOs has burst,” Lun said.

Jonathan Penkin, Goldman Sachs Group Inc.’s Hong Kong-based head of equity capital markets in Asia outside Japan, estimated in June that as many as 100 companies may be reviving Hong Kong IPO plans delayed by the 2008 market rout.

Companies are taking advantage of a stock rally to improve their balance sheets amid signs the global economic recession is easing and on expectations China’s stimulus program will boost long-term demand. Hong Kong’s benchmark Hang Seng Index has almost doubled from a one-year low on Oct. 27.

China Metallurgical will use the net proceeds of HK$15.6 billion from the sale to develop overseas metallurgical and mine construction projects, the company said on Sept. 23.

The company is constructing mines outside China as commodity prices rally. It’s building the $1.4 billion Ramu nickel project in Papua New Guinea and the Aynak copper mine in Afghanistan. It’s also working on plants for Tangshan Iron & Steel Group and Anshan Iron & Steel Group in northern Chinese provinces, according to its offer document.

Morgan Stanley, Citigroup Inc., China International Capital Corp. and Citic Securities Ltd. arranged Metallurgical’s Hong Kong sale.

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