China Metal Resources Utilisation, which manufactures products from recycled copper, aims to raise around HK$680 million in a Hong Kong initial public offering to fund plant construction and repay loans, saying it is confident government subsidies and tax rebates that it relies on will be maintained in the next few years.
"China has placed high emphasis on environmental protection in the past few years," chairman Yu Jianqiu told a press conference in Hong Kong yesterday. "We believe government support for metals recycling will rise in the next few years."
Sichuan-based China Metal received 100 million yuan (HK$128 million) of value-added tax (VAT) refunds and 35 million yuan of government subsidies in the first nine months of last year. Together they amounted to 74 per cent of its operating profit, up from 14 per cent in the same period a year earlier.
Operating margin before the refund and subsidies fell 20.5 per cent year on year to 48 million yuan, despite sales doubling to 1.7 billion yuan.
Chief financial officer Frank Chan Ngai-chi said the margin fall was due to the firm's strategy of procuring most of its scrap copper from individuals rather than corporate suppliers. Individuals could not provide VAT invoices to scrap metal buyers like China Metal, and that meant it had to pay more VAT and in turn received more VAT rebate.
Prices of scrap supplied by individuals were also higher, which cut China Metal's gross and operating profit margin, he added.
China Metal's net profit tripled year on year to 132 million yuan in the first nine months of last year. Net profit margin rose to 7.8 per cent from 5.3 per cent.
Despite Yu's optimism about government support, China Metal cautioned in its listing prospectus that there was no assurance it would continue to enjoy VAT refunds and subsidies.
The prospectus also said the firm had breached some bank loan covenants by failing to maintain required inventory levels and had used funds received from pledged trade receivables other than for loan repayment without banks' consent.
Chan said the banks had not demanded early loan repayment from China Metal and the loans had since been repaid.
China Metal forecast a net profit of not less than 230 million yuan for last year, but said it did not plan to distribute any dividend. That is partly due to banks' conditions on 49.5 million yuan of loans it owes, which ban some units from paying dividends.
It plans to use two-thirds of proceeds from the sale of 618.5 million shares, at HK$1 to HK$1.20 each, to expand production capacity and most of the remainder to repay loans from Yu.
The bulk of China Metal's operations were part of biodiesel maker Gushan Environmental Energy, which was listed in 2007 but was privatised by Yu in 2012.