West China Cement works on internal weaknesses
West China Cement, which plans to delist from London's Alternative Investment Market (AIM) and list on the Hong Kong stock exchange, has identified debt and deficient internal controls as risk factors.
'Our internal controls over financial reporting may have deficiencies and weaknesses,' according to the mainland cement producer's prospectus. West Cement engaged a 'reputable' external consulting firm to review its internal controls and found deficiencies in financial reporting, the prospectus said. The company has since improved its internal controls.
'However, we cannot assure you that any deficiencies or weaknesses in our internal control for financial reporting will not occur in future,' it said. The prospectus said 54 per cent of net proceeds from its Hong Kong IPO would be used to repay debt, including US$75 million from various companies affiliated with the Industrial and Commercial Bank of China (ICBC). ICBC International Capital and the Hong Kong branch of Deutsche Bank are the joint global co-ordinators, bookrunners and sponsors of West China's IPO set to launch on August 23.
ICBC International Securities and the Hong Kong branch of Deutsche Bank are joint lead managers of the offering.
Assuming a mid-range offer price of HK$1.45, net proceeds of the IPO would be HK$1.09 billion. The company's net current liability was 1.06 billion yuan (HK$1.25 billion) and its gearing ratio was 49 per cent as of April 30.
'Our high level of indebtedness could materially and adversely affect our liquidity,' West China's IPO prospectus said. But West China chairman Zhang Jimin said the Hong Kong listing was not driven by debt pressures. 'Even if we did not list, our debt situation would be normal.'
Adrian Tsang, co-head of investment banking at ICBC International Capital, said West China was 'a high-growth company so all the banks are very supportive'.
West China estimates its net profit for the first half will be at least 307 million yuan. In the first four months of this year, its revenue soared 93.3 per cent to 675.3 million yuan while net profit rose 69.9 per cent to 154.3 million yuan. Institutional investor interest in West China's IPO had been 'very good', Tsang said.
The company plans to spend 46 per cent of the net proceeds of its IPO on capacity expansion.
It expects its annual cement production capacity to increase from 9.6 million tonnes at present to 12.5 million tonnes in February next year.
The company's cement production is concentrated in the northern province of Shaanxi, where it is the second biggest cement producer. Most of its cement is sold to state infrastructure projects.
'The Chinese government's plan to develop western China for the next 10 years is a historic opportunity for our company,' Zhang said.
'As the gateway to northwest China, Shaanxi is a key beneficiary of the Western Development Plan,' Zhang said. 'Investors in the UK don't understand China well, so we decided to list in Hong Kong.'
Tsang said AIM was a smaller capital market than Hong Kong, and mainland companies could more easily refinance in Hong Kong.
