China has boosted its financial support for the country’s troubled No 1 aluminium maker, whose shares have been halted since March following a short-seller attack.
A unit of Citic Group Corp, the nation’s biggest state-owned conglomerate, will buy a 10% stake in China Hongqiao Group for HK$5.49bn ($702mn), according to a statement from Hongqiao on Tuesday. The sale to CTI Capital Management Ltd represents a 3.6% discount to Hongqiao’s last traded price. The aluminium producer will also issue $320mn in convertible bonds to another unit of Citic, CNCB (Hong Kong) Capital.
Citic’s equity purchase was first mooted in March, a month after allegations from short-seller Emerson Analytics Co that questioned Hongqiao’s accounts and valuation, which the company has refuted. Hongqiao subsequently halted its shares on March 22, flagging a delay to its full-year results as it grappled with issues raised by its auditor.
In a separate release Tuesday, Hongqiao confirmed it would cut annual capacity of 2.68mn metric tonnes, about 29% of its total, after a related company “misconducted the construction” of five plants. While acknowledging that the closures would hurt sales, Hongqiao said higher prices due to the government’s so-called supply-side reforms will improve profitability. It also flagged potential asset disposals to mitigate the impact of the cuts, which would leave its capacity at 6.46mn tonnes, still the biggest in the world.
“The Citic deal means Hongqiao is getting the support and the confidence of the state, to address some of the concerns in the capital markets,” Yi Zhu, analyst at Bloomberg Intelligence, said by phone from Hong Kong. “The capacity reductions are a big blow but at least they are able to scale down but keep using the more modern and more cost-efficient plants.” Aluminium has surged this year as China’s government tackles overcapacity by ordering a swathe of closures. In Shandong where Hongqiao operates, another producer, Xinfa Group, shut more than 500,000 tonnes of capacity last month. After Hongqiao confirmed its capacity cuts, aluminium rallied as much as 1.1% to its highest since 2014.
The funds for the deals announced Tuesday will be used for debt repayment and working capital, Hongqiao said. In June, a third Citic unit, China Citic Bank Corp, gave Hongqiao a 20bn yuan ($3bn) credit line for two years with a view to promoting deeper cooperation between the groups, the aluminium company said at the time.