Angang New Steel watched its share price surge yesterday after announcing a purchase deemed as 'too good to be true'.
The counter rose 12.08 per cent to close at 51 cents on heavy turnover, compared with a 5.43 per cent increase in the H-share index.
The company said on Sunday it planned to buy a steel plant from parent Anshan Iron & Steel Group Complex at a price-earnings ratio of slightly more than two times last year's after-tax profit.
A European brokerage analyst said: 'The profit is unbelievably good. How can they only spend just over 340 million yuan for assets that yield about 245 million yuan of pretax profit a year? That sounds too good to be true.' Analysts said the deal was aimed at helping out the cash-hungry parent and boosting earnings at the H share.
They suspected the steel plant's profit for last year had been massaged and might fall dramatically this year with higher costs due to price increase in raw materials supplied by the parent.
Angang deputy general manager Fu Jihui rejected suggestions that the sale was aimed at relieving financial pressure on the parent, saying it could solve any difficulties by raising bank borrowings.
He said the H share's existing products - cold rolled sheets, wire rods and thick plates - had been hit by falling prices, keen competition from domestic and international rivals and softening demand last year.
There was a stable market and prices for the steel plant's products - large section steel, steel rails and pipe billets - as domestic output and the number of producers were relatively small with reasonably strong demand.
Mr Fu said the terms of the deal were fair and would need shareholders' approval.
He also stressed that last year's earnings at the steel plant, although unaudited, had been compiled according to mainland standards.
After tax, the steel plant reported about 160 million yuan (HK$148.8 million) in profit, compared with a forecast of about 180 million yuan.