Shares in China’s Chalco rise after state firm reveals plans to raise US$1.90b by selling stakes in four units

Deals involve state asset managers and insurers in debt-for-equity swaps, and are considered part of China’s supply side reforms

PUBLISHED : Tuesday, 05 December, 2017, 2:47pm
UPDATED : Tuesday, 05 December, 2017, 11:04pm

Shares in Aluminium Corporation of China (Chalco), the nation’s second largest smelter of the lightweight industrial metal, gained as much as 3.6 per cent in morning trade after it unveiled debt-for-equity swap deals at four of its subsidiaries with eight investors, worth a 12.6 billion yuan (US$1.9 billion).

The four Chalco units are Chalco Shandong, Chalco Zhongzhou Aluminum, Baotou Aluminum and Chalco Mining, and the plan is aimed at reducing debt among the state sector, part of Beijing’s ongoing economic policy of supply-side reform.

Funding from the investors, comprising a state-backed distressed debt processor, insurers and banks, will lift Chalco’s annual net profit by 300 million yuan and cut its total debt-to-equity from 72 per cent at the end of September to 66 per cent, the firm said in a filing to Hong Kong’s bourse late on Monday, a move that comes at a time when China is looking to slash state corporate debt.

Chalco will sell a combined 30.8 per cent of Chalco Shandong for 1.79 billion yuan, a 36.9 per cent stake in its Zhongzhou Aluminum unit for 2.40 billion yuan, and 25.67 per cent of Baotou Aluminum unit for 2.64 billion yuan.

The investors include China Life and China Pacific Life Insurance, both financial asset investment arms of Bank of China, Industrial and Commercial Bank of China and Agricultural Bank, and units of distressed-asset managers Huarong Ruitong Equity Investment Management and Shenzhen China Merchants-Ping An Asset Management.

Separately, units under Huarong, fund manager Shenzhen China Merchants-Ping An, China Cinda Asset Management and Bank of China have agreed to buy 81.1 per cent of bauxite producer Chalco Mining, by paying 170 million yuan cash and swapping 5.6 billion yuan worth of convertible bonds into common shares.

The Shandong unit posted a net profit of 304.7 million yuan last year after a loss of 374.7 million in 2015, helped by tightening supply and rising prices of aluminium.

The problem of high leverage will be alleviated effectively, and is in line with the national policy [on] deleveraging and cost reduction under [Beijing’s] supply-side structural reform
Chalco statement

“The problem of high leverage will be alleviated effectively, and is in line with the national policy [on] deleveraging and cost reduction under [Beijing’s] supply-side structural reform,” Chalco said in a statement.

Debt deleveraging and supply-side reform are key planks of President Xi Jinping’s economic reform, which involve the use of administrative means to retire excess industrial capacity, and reduce debt leverage partly by swapping creditors’ debt for shares in struggling firms.

“The upcoming winter production cuts in Shandong [to help fight air pollution in northern China] will further tighten aluminium supply,” HSBC head of China metals and mining equity research wrote in a note last month, adding Chalco’s profitability is expected to continue to improve in the next 12 months.

Chalco is forecast to see net profit surge from 402.5 million yuan last year to 2.46 billion yuan this year and 5.24 billion yuan next year, according to the average estimate of 12 analysts polled by Bloomberg.

Chalco closed the morning session 1.7 per cent higher at HK$5.33 at noon, after trading as high as HK$5.43.