Citic Pacific

Why a US$3.3 billion merger between Citic’s specialist units adds steel to China’s self sufficiency ambitions

  • Daye Special Steel agrees to buy 86.5 per cent stake in Xingcheng Special Steel for 23.18 billion yuan
  • Shares in Daye rise in Shenzhen, Citic stock boosted in Hong Kong
PUBLISHED : Friday, 04 January, 2019, 7:03am
UPDATED : Friday, 04 January, 2019, 7:03am

Shares in Chinese financial-to-industrial conglomerate Citic gained on Thursday after Daye Special Steel, in which it owns a 58.1 per cent stake, agreed to buy a 86.5 per cent stake in Citic-controlled Xingcheng Special Steel for 23.18 billion yuan (US$3.3 billion).

The reverse takeover by Shenzhen-listed Daye, announced in a stock exchange filing late on Wednesday, represents the largest restructuring at state-owned Citic in three years. Citic, which is listed in Hong Kong and is China’s largest conglomerate, is creating an industry leader. It said in a statement the transaction would help to “unlock the true value” of its special steel business, enhance its disclosure and transparency, and bring “greater synergies across the business”.

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The merger between Daye and Xingcheng will enhance the overall value of its steel assets and broaden their financing options, which could improve China’s production capacity for higher grade steel products and reduce import reliance, analysts said.

“The restructuring will see the majority of Citic’s best-quality special steel assets come under one listed specialised vehicle,” said Li Hongmei, head of content at consultancy Mysteel Global. “This will bolster the combined operations’ fundraising capability.”

She said the deal comes as China’s overall steel sector closes in on a peak in its latest industry upswing, which began in 2016.

The restructuring will see the majority of Citic’s best-quality special steel assets come under one listed specialised vehicle
Li Hongmei, head of content, Mysteel Global

Based in Huangshi, in central China’s Hubei province, Daye makes a wide range of alloy-steel products used in railway, tools, new energy, automobiles, mining, oil and gas, chemicals and electricity sectors. Xincheng, which is based in Jiangyin, in the eastern Jiangsu province, produces steel used for manufacturing gears, bearings, springs, various structural alloys used in ships and ocean engineering, as well as boilers and other engineering machinery.

Daye’s output stood at 2 million tonnes in 2017, while Xincheng produced 6.9 million tonnes that year. Citic’s special steel capacity stood at 13 million tonnes.

The outlook for the special steel sector is rosier than that for the commodity steel industry, given Beijing’s desire for self-sufficiency in quality steel products that command high prices, said Li.

“From machinery manufacturing to oil and gas pipelines to infrastructure such as bridges, China needs more special steel for its anticorrosive property, stress resistance and durability. And Beijing wants the country to consume and produce more of such high-quality products,” she said.

Investors cheered the deal. Shares in Daye closed 3.8 per cent higher at 9.1 yuan on Thursday, while Citic gained 2.5 per cent to HK$12.14, outperforming the wider market. The Shenzhen Stock Exchange composite index fell 0.8 per cent while the Hang Seng Index in Hong Kong ended 0.3 per cent lower.

Daye’s net profit grew by 36.6 per cent year on year to 380.5 million yuan for the first nine months of 2018, as sales jumped by 27.4 per cent to 9.4 billion yuan. Its net assets amounted to 4.27 billion yuan at the end of September.

Chinese conglomerate Citic swaps residential properties for China Overseas’ shares and commercial projects

The last major restructuring at Citic happened in March 2016, when it sold its mainland China residential property business to China Overseas Land & Investment for 31 billion yuan, to focus on commercial property development.