Chemical giant in billion-dollar hunt
JILIN Chemical Industrial, the next H share listing in Hong Kong, will have to borrow heavily to fulfil its ambition of becoming China's leading petrochemical producer.
The company plans to raise HK$1.97 billion via a global share issue in the middle of next month, but the proceeds fall well short of its 15.2 billion yuan (about HK$13.9 billion) expansion plans, according to analysts.
The chemical giant will conduct a roadshow tomorrow in Hong Kong - where it is planning to raise just $100 million because of weak market sentiment - and then take its offer to the United States.
Jilin is in the middle of an expansion programme that will triple its ethylene production capacity.
The project, one of four large-scale petrochemical projects under construction in China, comprises 11 production units, of which Jilin owns four. The remaining seven are held by Jilin's parent.
Of the estimated 15.2 billion yuan total investment, 5.9 billion yuan is earmarked for the four facilities. The investment includes a foreign currency component of US$889 million, of which $420 million will be for the four units.
The four units are a 300,000-tonne per annum capacity ethylene facility, a 600,000 tonnes a year hydro-cracking facility (used in refining crude oil), a 400,000-tonne a year integrated aromatics facility and a 20,000-tonne a year ethylene-proplyene rubber facility.
Jilin has an option which expires at the end of 2002 to buy one or more of the other facilities from its parent.
The option has raised concern among analysts about the company's financial strength should it decide to swallow such a huge project.
Edward Chan, China research director of Standard Chartered Securities, said: 'Jilin has a relatively high gearing of 50 per cent, and its interest expenses will double in 1997 following the start of the four facilities.' Given the difficulties in raising funds in China, that could delay construction of the seven units, he said.
According to a research report of James Capel, this could result in a demand lag, whereby Jilin might not be able to sell its new supply of ethylene for processing by the additional seven units.
However, Elizabeth Cheng, an analyst at James Capel, said: 'The project is supported by the central government and China's inflation problem has been under control, so the slow flow of funds for committed investment in the past will be improved.' Ms Cheng said Jilin would have enough funds to carry on the construction of the four facilities. Building has started and they are due to be completed next year.
Analysts suggested that Jilin shares should be priced at a discount to Shanghai Petrochemical's current price-earnings ratio of 8.6 times.
'Shanghai Petrochemical has a well established production system, while Jilin has a long way to catch up,' a local analyst said.
Merrill Lynch has been appointed as the global sponsor of Jilin's share issue.
Credit Lyonnais, HSBC and China Development Finance are the underwriters. Jilin shares will start trading at the end of May.
