Shares of Honghua tumbled 15.5 per cent Tuesday to 82 HK cents, after the announcement of the restructuring, as the price of the new stock were issued at a discount of 20.6 per cent to Monday’s closing price.

Honghua intends to use half of the net proceeds for repayment of its debts and the rest to bolster its general working capital, the company said.

“The directors believe the subscriptions will strengthen the group’s cash position, widen its shareholder base and will not result in additional interest expenses,” according to its statement.

Shenzhen-based CASIC is a technology firm directly owned by China’s central government, operating six publicly traded companies with more than 120,000 employees, according to its website. It’s a Honghua customer of electrical drives that supply mechanical energy for motion control.

The indebted Sichuan company can benefit from CASIC’s financial backing, research and product development, said Nomura’s head of Asia oil and gas research Gordon Kwan.

“Both deep level oil and gas drilling and aerospace require equipment that can withstand high temperature and high pressure environment, so it’s not surprising that they have a supplier-customer relationship,” Kwan said in an interview with the South China Morning Post.

CASIC is entitled to nominate three directors in Honghua’s board, including the chairman. The board current comprises three executive directors and six non-executive ones.

Current chairman Zhang Mi will be re-designated as vice chairman upon completion of the shares sales, subject to approval by Honghua’s shareholders in an extraordinary shareholders meeting.

The board has a “preliminary understanding” with CASIC, that the board will seek an undertaking by Honghua’s senior management not to sell over 20 per cent of their shares within three years from completion of the shares sale to CASIC. Jianhong has pledged not to sell its Honghua shares for six months.

Honghua shares have jumped 88 per cent in the past three months, which Kwan attributed to oil price’s rebound on production cuts by major suppliers and speculation the United States under President-elect Donald Trump may remove investment sanctions against Russia which is a major overseas market of Honghua.

Honghua posted a first-half net loss of 250.9 million yuan. It swung to a loss of 252.2 million yuan last year, from a 2014 profit of 91.8 million yuan, and a 2013 profit of 537.6 million yuan.

Its net debt-to-shareholders’ equity ratio stood at 82.5 per cent at the end of June, up from 72.5 per cent a year earlier.