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Marketmen cool to Nanjing Iron restructuring

By Wang Ying (China Daily)
Updated: 2009-05-29 10:21

The company calls it rationalization, but the intricate restructuring plan announced by Shanghai-listed Nanjing Iron & Steel has failed to impress marketmen.

Nanjing Iron shares fell by more than 5 percent to close at 4.42 yuan (65 cents)on Wednesday after trading in the scrip began on Tuesday following a suspension from April 22.

In a note to the Shanghai Stock Exchange, Nanjing Iron said it plans to sell more than 2 billion shares at 4.23 yuan apiece to Nanjing Nangang United Co (NNU) in exchange for 10 assets valued at 8.6 billion yuan. The assets include a wire plant, a shipping company, and an iron ore mine.

Following the restructuring, NNU will hold a 62.69 percent stake in the listed entity Nanjing Iron. NNU is, in turn, 40 percent owned by Nanjing Iron & Steel Group Company, the largest steel-making group in Jiangsu province.

The balance 60 percent is owned by three affiliates of Fosun International, controlled by billionaire Guo Guangchang.

The proposed restructuring, in effect, gives Guo effective control of listed Nanjing Iron.

In the statement, Nanjing Iron & Steel said that the "asset swap" would help diversify the operation of the company, strengthen its competitiveness, and reduce future inter-group trading.

The initial market response to the company's move was apparently positive. The price of Nanjing Iron jumped 9.5 percent, just a shade under the daily limit, in the morning trading after the restructuring plan was made public.

But investors' enthusiasm quickly evaporated in the afternoon and has never returned since.

"The market fears a diluted profit, especially during an economic slowdown," Qin Bo, industry analyst, Guosen Securities, said.

"After the restructuring, EPS (earnings per share) of Nanjing Iron will lose 10 percent, dropping to 0.039 yuan," Qin said.

Zhou Xizeng, analyst, CITIC Securities, avers that the real benefit from the restructuring will accrue later.

Related readings:  Nanjing Iron & Steel profits down 88%

"The new company will have 20 percent growth in production capacity, at 6.5 million tons each year. It is also a wise move to diversify a steel maker's production in order to embrace ever-growing competition in China's steel market," he said.

"Obtaining iron ore to self-satisfy is trendy in steel industry," said Qin.

"After incorporating the mining and shipping assets, Nanjing Iron will boost its resilience against industrial risks, and reduce the whole cost as well. Although the prospects for 2009 is still bleak, we cannot say the market will stay idle forever," he said.

In the last two years, consolidation has become more frequent in China's steel industry.

Public information shows that in 2007, 11 restructuring cases were reported, including Baosteel's acquisition of Bayi Steel. In 2008, 17 similar mergers were made. Analysts expect that with the market at a low ebb, more shakeups and consolidations are likely this year.

"During the restructuring boom, steel makers should learn to ascertain what is premium asset and what is not. They should not rush to expand, but do it on a scientific and prudent basis.

"On the other hand, the central government should provide more supportive policies and favorable financing terms to the firms. Local governments should discard the traditional mindset of local protectionism by allowing more restructuring cases to happen across the provincial borders," Qin said.

Analysts have maintained their rating on Nanjing Steel at "cautious recommend".