Heng Hup Holdings Limited to raise a maximum of approximately HK$155 million by way of Public Offer and Placing

February, 27/2019 - 11:16
Heng Hup Holdings Limited to raise a maximum of approximately HK$155 million by way of Public Offer and Placing

Highlights

  • A leading scrap ferrous metal trader inMalaysia, ranked first in terms of trading volume with domestic steel mills in2017, having a market share of approximately 20.8%[1].
  • Following the PRC's supply-side restructuringto eliminate excess steel manufacturing capacity in 2016 and the implementationof protective measures for the domestic steel industry by the Malaysiangovernment in April 2017, domestic steel industry in Malaysia has continued tomake a strong recovery since 2017, which in turn leads to a greater demand forscrap ferrous metals from domestic steel mills.
  • The Group has been an approved scrap metalprovider to the Lion Companies       [2],which was the largest steel producer in Malaysia in 2017 with stable andsignificant demand for scrap ferrous metals.
  • The Group was engaged by Alliance Steel (M)Sdn. Bhd., as its approved scrap metal provider in April 2018. The steel milloperated by it is a project under the cooperation between the Malaysian and theChinese government as part of the Belt and Road Initiative.
  • With the implementation of import bans onscrap materials in the PRC in the end of 2018, the Group entered into a jointventure agreement with Chiho Environmental Group Limited (stock code: 976) ("Chiho") in January2019 to develop a processing facility to provide scrap motor dismantlingservices to Chiho in Malaysia with an expected annual dismantling capacity of 70,000 tonnes


Financial Highlights

 

For the year ended 31 December

For the eight months ended 31 August

 

2015

2016

2017

2017

2018

 

RM'000

RM'000

RM'000

RM'000

RM'000

 

 

 

 

(Unaudited)

 

Revenue

429,564

378,529

739,428

420,391

568,756

Gross profit

35,643

31,710

53,791

29,935

36,834

Profit before income tax

18,600

16,058

30,956

18,934

27,949

Profit and total comprehensive

  income for the year/period

13,672

12,051

23,111

14,269

21,594

 

 

 

 

 






HONG KONG, CHINA - MediaOutReach  - 27 February 2019 - Heng Hup Holdings Limited ("Heng HupHoldings", together with its subsidiaries, the "Group"; stock code: 1891), a leading scrap ferrousmetal trader in Malaysia, announces the details of its plan to list on the MainBoard of The Stock Exchange for Hong Kong Limited ("SEHK") today.


A totalof 250,000,000 shares will be offered under the Share Offer, ofwhich 225,000,000Shares (subject to reallocation and the Over-allotment Option) or 90%, will beoffered by way of Placing; while the remaining 10%, or 25,000,000 Shares (subject to re-allocation) will be offered under the Public Offer. The Offer Price per Offer Share is expected to be not less than HK$0.50 andnot more than HK$0.62.The Public Offer will commence at9:00 a.m. on 27February 2019 (Wednesday) and close at 12:00 noon on 4 March2019 (Monday). The final offer priceand allotment resultsare expected to be announced on 14March 2019 (Thursday).Dealings in shares of Heng Hup Holdings on the Main Board of the SEHK areexpected to commence on 15March 2019 (Friday).


Assumingan Offer Price of HK$0.56per Offer Share(being the midpoint of the Offer Price range), the aggregated net proceeds fromthe Share Offer, after deducting related expenses, will be approximately HK$94.3 million. Heng Hup Holdings intends to use these net proceeds for the followingpurposes: 1) approximately 8.8% will be usedfor partially replacing its fleet of trucks; 2) approximately7.1% will be used for enhancing itsprocessing abilities; 3) 2.3% will be used for setting up its enterprise resource planning system; 4) 11.1%will be used for setting up a newscrapyard in the east coast of Peninsular Malaysia; 5) approximately15.6% will be used for expansion of its scrapyard in Selangor; 6) approximately45.1% will be used as its working capital for its scrap ferrous metal trading business; and 7) approximately10.0% will be used as its general working capital or for other generalcorporate purpose (excluding the purchase of scrap materials).


ShenwanHongyuan Capital (H.K.) Limited is the Sole Sponsor. ElstoneSecurities Limited and Shenwan Hongyuan Capital (H.K.) Limited are the JointGlobal Coordinators. Elstone Securities Limited, Shenwan Hongyuan Capital(H.K.) Limited, Haitong International Securities Company Limited and SPDBInternational Capital Limited are the Joint Bookrunners and the Joint LeadManagers.


Industry Overview

Following the PRC's supply-side restructuring toeliminate excess steel manufacturing capacity in 2016 and the implementation ofprotective measures (such as imposing additional import duties on steelproducts) for the domestic steel industry by the Malaysian government in April2017, the domestic steel industry in Malaysia has continued to make a strongrecovery since 2017 which, in turn, leads to a greater demand for scrap ferrousmetals from domestic steel mills to satisfy their production needs.


As steel producers are ramping up their productioncapacity in Malaysia, domestic steel production is expected to increase furtherfrom 2018 to 2022 to meet the growing demand from downstream industries, whichwill drive the use of scrap ferrous metals as raw materials for production. Thesustained economic growth together with a rise in both consumption andproduction for steel is expected to drive the domestic supply of scrap ferrousmetal in Malaysia to climb to 4.4 million tonnes in 2022 at a CAGR of 10.0%from 2018 to 2022. The demand volume of scrap ferrous metals in Malaysia isanticipated to grow at a CAGR of 9.7% from 2018 to 2022.


Inaddition, the usedbatteries traded in Malaysia is expected to grow at a CAGR of 11.0% from 2018to 2022. For the waste paper market, supported by the government incentives forresources recycling and rising demand for consumer goods, the volume of wastepaper traded in Malaysia are forecasted to rise at a CAGR of 10.8% from 2018 to2022.


Business Overview

According to Frost & Sullivan, the Group rankedfirst in terms of trading volume with domestic steel mills in 2017, having amarket share of approximately 20.8%. Over the years, the Group has establisheda nationwide supplier base of feeder yards from which it sources recyclablescrap ferrous metals for sales to steel mills in Malaysia. The Group alsooperates three scrapyards equipped with the processing machinery mainly forferrous metals strategically located in areas where the availability of scrapferrous metals can be assured and nearby its steel mill customers in the statesof Selangor, Melaka and Johor, with an aggregate land area of approximately35,000 sq.m.. In addition, supported by a fleet of 33 self-owned trucks amongwhich, 18 are trucks with laden weight of 20 tonnes or above as at 19 February 2019 (the "Latest PracticableDate"), it can always respond to the logistics needs ofits small and medium-sized suppliers, who have only limited logistics support,on a timely basis.


The Group also trades used batteries and wastepaper, which, in aggregate, accounted for 10.4%, 15.3%, 12.7% and 13.5% of itstotal revenue for the years ended 31 December 2015, 31 December 2016, 31December 2017 and the eight months ended 31 August 2018, respectively. TheGroup also operates one scrapyard mainly for waste paper located inthe state of Melaka, with a land area of approximately 1,436 sq.m..


Competitive Strengths

1)    The Group has thecapital base to maintain its leading position in the industry.

In the scrap trading business, the Group needs tohave sufficient working capital to operate as it is always required to settle itspurchases well before it receives sales proceeds from its customers. Directorsalso consider the Group's leading position in the industry has raised itsprofile in the market which facilitated it to source scrap ferrous metals fromvarious suppliers who often prefer to trade with buyers possessing thefinancial resources to settle trades readily.

 

2)    Its executiveDirectors and sourcing team possess extensive scrap ferrous metal tradingindustry experience.

The combination of extensive operational expertiseand in-depth knowledge of scrap ferrous metal trading industry have enabled itsDirectors to secure and develop sustainable business strategies, assess andmanage risks and capture profitable opportunities. Its sourcing teamcommunicates with its suppliers daily to assist their daily operations andproactively explores new sources of supply of scrap materials to strengthen theGroup's supplier network.

 

3)    The Group'sscrapyards are strategically located in the areas where the availability ofscrap ferrous metals can be assured and nearby its steel mill customers.

The Group's scrapyards are strategically located inthe states of Selangor, Melaka and Johor, where theavailability of scrap ferrous metals can be assured. In addition, the Group'sscrapyards are nearby its steel mill customers in the states of Selangor andJohor. Since the scrap ferrous metals are bulky in terms of size and weight,its location of scrapyard allows it to lower the transportation costs fordelivery of scrap ferrous metals.

 

4)    The Grouppossesses its own fleet of trucks to serve its suppliers

As at the Latest Practicable Date, the Group had 33trucks in use for its collection and delivery of scrap materials, among which 18trucks were trucks with laden weight of 20 tonnes or above. Its Directorsconsider that the logistics support offered to its suppliers for delivery ofthe scrap ferrous metals is crucial to develop its suppliers' loyalty to supplyscrap ferrous metals to it.

 

5)    The Group has been an approved scrap metal providerto the Lion Companies since 2010, which were the largest steel producers inMalaysia in 2017 with stable and significant demand for scrap ferrous metals.

The Lion Companies accounted for over 90% of the Group's revenue attributableto the sale of scrap ferrous metals during the Track Record Period. Having thelargest steel producers in Malaysia as its customer, the Group enjoys a stable and significant business flow which hasraised its profile in the market and enabled it to establish a nationwidenetwork of suppliers.

 

BUSINESS STRATEGIES

1)    Partially replaceits fleet of trucks

As scrap ferrous metals are bulky and heavy and thesource is highly localised and scattered across Malaysia, the Group usuallyneeds trucks to pick up scrap ferrous metals from itssmall-scaled suppliers to its scrapyards; and to deliver scrap ferrous metalsfrom its scrapyards/ third-party scrapyards in larger scale to steel mills. TheGroup intends to utilise approximately 8.8% of the net proceeds of the ShareOffer to purchase 12 new trucks.

 

2)    Enhance itsprocessing abilities

The Group's largest customer, the Lion Companies,has agreed to offer it a higher procurement price for oversized scrapferrous metals which are cut into the prescribed size. As such, the Groupintends to utilise approximately 7.1% of the net proceedsof the Share Offer to purchase two metal cutters, one for each of its SelangorScrapyard and Melaka Scrapyard I.

 

3)    Set up itsenterprise resources planning system

Given the favourable backdrop of the steel industryfor domestic steel mills in Malaysia, the Group believes its business willcontinue to grow and the amount of transaction data and financial records to beprocessed will also increase. Therefore, the Group intends to utiliseapproximately 2.3% of the net proceeds of the Share Offer to set up its ownenterprise resources planning system which would enable it to process such dataand records on a timely basis, to improve its operational efficiency and toreduce its administrative costs in the long run.

 

4)    Set up a newscrapyard in the state of Pahang on the east coast of Peninsular Malaysia

The Group has started to sellscrap ferrous metals to Alliance Steel (M) Sdn. Bhd. since April 2018. TheGroup believes the new scrapyard can increase the supply from the state ofPahang and reduce its reliance on the scrap ferrous metals supply from thestates of Selangor and Johor insofar as its sales to Alliance Steel (M) Sdn.Bhd. is concerned and divert the supply from the states of Selangor and Johorto the steel mills nearby to minimise transportation costs and improve thedelivery efficiency. The new scrapyard is expected to commence operations inJuly 2019 and the maximum annual processing capacity of the new scrapyard is expectedto be 72,000 tonnes of scrap ferrous metals. The Group intends to utilise approximately11.1% of the net proceeds of the Share Offer to set up this scrapyard.

 

5)    Expansion of itsscrapyard in Selangor

The Group intends to construct a new scrapyard cuman office building on a piece of land, which is self-owned and adjacent to theexisting Selangor Scrapyard. The aggregate land area of the expanded scrapyardwill be approximately 20,079 sq.m.. It is expected that the additional maximumannual processing capacity of the expanded scrapyard is 18,000 tonnes of scrapferrous metals,  and the entire construction and expansion will becompleted by September 2020. The Group intends to utilise approximately 15.6% ofthe net proceeds of the Share Offer to expand its scrapyard in Selangor.


 

 

6)    Working capitalfor its scrap ferrous metal trading business

As the trade receivables turnover days is generallylonger than the trade payables turnover days, theGroup requires cash flows to settle with itssuppliers in advance of the receipts of proceeds from its customers. If theGroup's sales volume increases, the Group's demand for working capital willrise as well. The Group intends to apply 45.1% of the net proceeds of the ShareOffer as additional working capital for its scrap ferrous metal tradingbusiness.


About the Group

Heng Hup Holdings is a leading scrap ferrous metal trader inMalaysia. According to Frost & Sullivan, the Group ranked first in terms oftrading volume with domestic steel mills in 2017, having a market share ofapproximately 20.8%. The Group operates three scrapyards equipped with theprocessing machinery mainly for ferrous metals strategically located in areaswhere the availability of scrap ferrous metals can be assured and nearby itssteel mill customers in the states of Melaka, Selangor and Johor, with anaggregate land area of approximately 35,000 sq.m.. The Group is supported by afleet of 33 self-owned trucks among which, 18 are trucks with laden weight of20 tonnes or above as at the Latest Practicable Date.

 

For the years ended 31 December 2015, 31 December2016, 31 December 2017 and the eight months ended 31 August 2018, the Group'srevenue amounted to RM429.6 million, RM378.5 million, RM739.4 million andRM568.8 million, respectively.



[1] Source: Frost & Sullivan

[2] Lion Industries Corporation Berhad and its related company, MegasteelSdn. Bhd are referred to as Lion Companies

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