Mergers & Acquisitions

China Hongqiao to buy controlling stake in downstream operator Loften for 10 billion yuan

The world’s largest aluminium smelter will own 73.7 per cent of aluminium sheets maker Loften after deal aimed at improving ‘product mix’

PUBLISHED : Tuesday, 06 December, 2016, 10:13pm
UPDATED : Tuesday, 06 December, 2016, 10:58pm

China Hongqiao, the world’s largest aluminium smelter that has been fighting accusations of impropriety, has announced it will spend 10 billion yuan to take control of downstream operator Loften Environmental Technology.

Shandong province-based Hongqiao, 81.1 per cent controlled by mainland tycoon Zhang Shiping, agreed on Monday to buy 1.6 billion new shares of Shenzhen-listed Loften at 6.23 yuan each, for a 63.4 per cent stake, the company said in a filing to Hong Kong’s stock exchange on Tuesday.

Together with 261.1 million shares Hongqiao agreed in mid-August to buy from Loften’s controlling shareholder Yu Rongqiang at 3.64 yuan each, Hongqiao will own 73.7 per cent of Loften after both deals are completed.

The firm did not say in its filing how it plans to finance the acquisition of Loften. It had 12.5 billion yuan of cash and 12.6 billion yuan committed to spending on property, plant and equipment on June 30. Its net debt-shareholders’ equity ratio stood at 130 per cent.

Hongqiao’s shares closed 0.7 per cent lower at HK$7.25 on Tuesday.

Boxing, Shandong-based Loften, an aluminium sheets maker, on Monday also agreed to acquire from independent third party Binzhou Hengwang all of Innovative Metal for 7 billion yuan.

Both Hongqiao and Innovative, an aluminium alloy producer, are based in Zhouping, Binzhou city in Shandong.

“The acquisitions are expected to enhance the effort of the group’s industrial integration, improve the product mix and extend the industrial chain,” Hongqiao said. “The Group expects that the acquisitions will play a very important role in enhancing the group’s position in the area of aluminium deep processing.”

The acquisitions are expected to enhance the effort of the group’s industrial integration, improve the product mix and extend the industrial chain
China Hongqiao statement

Loften recorded a net loss of 118.4 million yuan last year, compared to a loss of 346.6 million yuan in 2014. Revenue slid 25 per cent to 1.53 billion yuan last year from 2014.

Loften said in its third quarter results announcement that it expects to post a net profit of between 15 million and 25 million yuan this year, thanks to better receivables collection and lower bad debt after selling its loss-making aluminium foil and sheets operations and shifting its focus to high precision aluminium sheets.

Loften had 1.2 billion yuan of net assets at the end of September, Hongqiao said.

The latest acquisition price means Hongqiao has valued Loften at 15.7 billion yuan, or 1.4 times its net asset value after Hongqiao’s 10 billion yuan shares subscription.

It is much higher than the 0.63 times share price-to-net asset value multiple of aluminium processing industry leader, Liaoning province-based and Hong Kong-listed China Zhongwang.

Unlisted Innovative posted a net profit of 323.9 million yuan last year, up from 120.3 million yuan in 2014, Hongqiao said, adding it had 1.39 billion yuan of net asset value on September 30.

A spokesman for Hongqiao said Innovative is one of its major customers.

According to its website, Innovative makes aluminium alloy products including car wheel hubs, aluminium sheets, and products for the aviation, industrial, electronics and construction sectors. It has over four million tonnes of annual output capacity, making it one of China’s largest aluminium alloy producers, it said.

Loften’s 7 billion yuan acquisition price for Innovative represents 21.6 times the latter’s net profit last year, much higher than the 7.5 times commanded by China Zhongwang.

Hongqiao has not responded to emailed questions seeking comments on the valuations of the acquisitions.

Argonaut Securities metals and mining analyst Helen Lau said China’s aluminium processing sector is highly fragmented, and to make a good profit margin companies have to invest heavily in advanced equipment and acquire know-how on alloy elemental compositions.

Almost two weeks ago, Hongqiao was accused by an anonymous report posted on of failing to disclose the connected nature of various transactions and using them to inflate and “launder” funds back to firms linked to its majority shareholders.

Hongqiao on the same day issued a statement denying the allegations, adding it was preparing a detailed announcement to rebut and clarify the accusations.