Is it a bowler hat or a snake swallowing an elephant? The question – asked about a drawing in Antoine de Saint-Exupéry’s novella Le Petit Prince – is a litmus test for the imagination. Picking the snake, according to its narrator, is a sign of someone who can dream the impossible dream. But such fanciful imagery – the swallowing of an elephant – might also be assigned to a recent asset consolidation plan by Sasac-owned China National Building Material (CNBM).
In a move to create the country’s largest cement company, CNBM announced on March 2 that it would be merging five of its subsidiaries in a deal worth Rmb98 billion ($15 billion). Four of the firms – namely China United Cement, South Cement, Southwest Cement and Sinoma Cement – will be folded into Shenzhen-listed Tianshan Cement, bumping up the latter’s business more than 16-fold to Rmb268 billion in assets.
With a market capitalisation of just Rmb17.7 billion, Tianshan Cement will finance 96% of the transaction by issuing new shares to 25 parties. It will raise an additional Rmb5 billion via private equity placements to another group of investors. The move will effectively lift CNBM’s interest in Tianshan Cement from 46% to 88%.
Nine months in the making, the deal incorporates the majority of CNBM’s assets in the cement industry (which earned 62% of its revenue last year). Headquartered in Urumqi in Xinjiang, the restructured Tianshan Cement will offer production capacity of 400 million tonnes of cement, 300 million tonnes of cement clinker, 400 million cubic metres of commercial concrete and 100 million tonnes of aggregate every year.
The consolidation will push the current market leader Anhui Conch Cement into second place in size, although Anhui Conch is generally viewed as the better-managed company. In spite of Covid-19, net profit at the Hong Kong-listed firm rose 4.6% on the year in 2020 to Rmb35.1 billion on a 12% increase in sales to Rmb176 billion.
Tianshan’s prospects could yet be punctured by a huge surge in its debts. Following the reorganisation, its leverage ratio will rise above 67%, compared with an average of 32% among its peers. Forecast profits and revenues post-merger of Rmb11.3 billion and Rmb169 billion will still lag Anhui Conch as well.
CNBM’s megamerger is meant to curtail unproductive capacity in the industry, amid the government’s broader push for ‘supply side reforms’ in a number of industries saddled with excess production (see WiC316). With much of its footprint in northwestern China, Tianshan reported capacity utilisation rates of just 43% in 2019, versus an average 74% for the four peers it is going to acquire. A wider portfolio and broader geographical reach also puts the merged entity in a better position to weather seasonality in demand, according to Huatai Securities, a local brokerage.
Since China started its recovery from the coronavirus outbreak last year, cement prices have been firming up. Cement clinker in particular saw a rally to Rmb390-400 per tonne last month as construction projects started earlier than usual due to reduced travel from migrant workers over Chinese New Year.
Aside from a huge pipeline of infrastructure and property projects this year, cement prices could also be buoyed by increasingly constrained supply, Northeast Securities claims. That could continue over the longer term: the plan to reach carbon neutrality by 2060 (see WiC513) will have an impact on cement makers, as their emissions account for 13% of the industrial sector’s carbon footprint.
Similar dynamics have encouraged more consolidation within the marketplace. In another case of M&A activity last month, Shenzhen-listed Gansu Shangfeng Cement announced plans to buy 85% of Inner Mongolia’s Songta Cement for Rmb112 million. The foundations of the cement sector are set for an overhaul, it seems.
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