BBMG deal firms up China's sloppy cement industry

West China Cement

30/06/2016 06:57

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) 
    By Quentin Webb 
    HONG KONG, June 30 (Reuters Breakingviews) - A Chinese 
building materials group is helping to firm up China's sloppy 
cement industry. Beijing-based BBMG  601992.SS   2009.HK  is 
injecting $2 billion of assets into Jidong Cement  000401.SZ  
and taking control of its weaker rival's parent company. This 
and other big deals are helping rationalise China's glutted 
construction-goods industry - even if the M&A is often neither 
quick nor straightforward. 
    Tackling overcapacity in coal, steel, cement, glass, 
aluminium and ship-making is key to President Xi Jinping's 
"supply-side" reforms. After reckless expansion in China's boom 
years, far too many plants are now idle: the country's cement 
business used just 71 percent of its capacity last year, UBS 
reckons. Unused production is even greater in steel, coal and 
glass.  
    Beijing wants the strong to take charge. In cement, that 
means the top ten producers will have 60 percent of the market 
by 2020, up from 53 percent now, according to UOB Kay Hian data. 
Bosses are listening. For example, China National Building 
Material (CNBM) and China National Materials Group have been 
talking about a "strategic reorganisation" since January.  
    The latest deal, first trialed in April, will see BBMG buy 
55 percent of unlisted Jidong Development for about 5.2 billion 
yuan ($780 million). The government of Tangshan, Jidong's 
northeastern hometown, will own the rest. On June 29 BBMG 
fleshed out the second part of the transaction, saying it would 
swap cement assets valued at nearly 13 billion yuan for 45 
percent of Shenzhen-listed affiliate Jidong Cement. 
    The terms look reasonable. Citi analysts say the investment 
in Jidong Development implies an enterprise value of 308 yuan 
per tonne of cement at Jidong, in line with other recent deals. 
The combined group should benefit from healthy 60 percent-plus 
market share in and around Beijing.  
    Still, the structure is fiddly, and the combined group will 
have to balance competing official interests in Beijing and 
Hebei. Consolidating big, listed groups might prove easier than 
persuading smaller non-public outfits to sell up. That limits 
the industry-wide scope for getting rid of excess supply. And 
there will be hiccups too: shares in West China Cement 
 2233.HK , another bid target, mysteriously crashed on June 28. 
They are now halted ahead of an update on a pending bid from 
Anhui Conch  600585.SS . It's a reminder that, in China, even 
overdue consolidation is rarely straightforward. 
 
    On Twitter https://twitter.com/qtwebb 
 
     
    CONTEXT NEWS 
    - Beijing building materials specialist BBMG said on June 29 
it had reached a deal to sell its cement and concrete businesses 
for stock in Shenzhen-listed Tangshan Jidong Cement, at a 
preliminary valuation of 12.95 billion yuan ($1.95 billion). 
    - Jidong Cement is also raising up to 3.0 billion yuan in 
fresh equity by selling shares to no more than 10 investors. 
Once both transactions are complete, BBMG will hold a 45.4 
percent stake in Jidong Cement. 
    - The asset injection is part of a broader tie-up that has 
been under discussion for months. On May 31, BBMG said it had 
agreed to buy 4.75 billion yuan of new shares in Jidong Cement's 
unlisted parent company, Jidong Development, and buy a further 
475 million yuan of existing shares. 
    - Those deals would give BBMG, which is listed in Shanghai 
and Hong Kong, 55 percent of Jidong Development. The remaining 
45 percent is owned by the State-owned Assets Supervision and 
Administration Commission (SASAC) of Tangshan, a city in Hebei 
province to the east of Beijing. Jidong Development is also a 
major shareholder in Shenzhen-listed Jidong Equipment. 
    - BBMG statement: http://bit.ly/29gUEvO   
    - Reuters: China's BBMG to sell stakes in cement-related 
units to Jidong Cement  urn:newsml:reuters.com:*:nL4N19L487 
     
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    - For previous columns by the author, Reuters customers can 
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 (Editing by Peter Thal Larsen and Katrina Hamlin) 
 ((quentin.webb@thomsonreuters.com;)(Reuters 
Messaging:)(quentin.webb.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA CEMENT/BREAKINGVIEWS