Steelmaker was made insolvent after being unable to repay loans
By Yang Huiwen 11 October 2008
Anxious shareholders of Ferrochina are stuck in limbo after trading in the stock was stopped indefinitely yesterday.
Ferrochina was rendered insolvent on Thursday after disclosing it was unable to repay part of its working capital loans of 706 million yuan (S$153 million).
Market observers expect a resolution to take weeks, or even months, so investors will not be able to liquidate their holdings at any price.
It is a dramatic fall for steelmaker Ferrochina, whose shares were once hotly traded by punters, retail investors and fund managers alike.
‘This drains away some confidence in China plays,’ said a remisier who has a few clients with the stock. Some bought in when Ferrochina was as high as S$1.50 and are now staring at six-figure losses.
The shock of its collapse caught out analysts, some of whom have bullish calls on the counter.
OCBC Research is suspending coverage on the company for the time being.
CIMB-GK analyst Lawrence Lye said ‘recent meetings with Ferrochina yielded no inkling of such problems’.
CIMB downgraded the stock from ‘outperform’ to ‘underperform’ and has a new target price of 35 cents - 35.78 per cent lower than its last traded price of 54.5 cents.
OCBC analyst Kelly Chia expects the firm to be valued at between 39 cents and 46 cents a share. This assumes a white knight comes to the rescue and pays a 40 to 50 per cent discount to the firm’s net tangible assets, which stands at 78 cents per share at the first half this year.
Ernst & Young Solutions LLP yesterday was appointed as financial adviser to guide Ferrochina on its restructuring.
‘Given that operations have temporarily been ceased and that interest costs will continue to accrue as time goes by, it is crucial for the company to move quickly to either bring in new money or refinance its loans to stave off liquidation and avoid a deepening of the big hole they are in,’ said DBS Vickers analyst Paul Yong.
Ferrochina’s predicament could be a sign of worse things to come, especially for companies that have gearing issues and need refinancing.
Since its initial public offering in 2005, Ferrochina has borrowed heavily to expand aggressively. Its share price soared to a high of $2.76 in July last year from its IPO price of 50 cents.
‘It goes to show that a highly leveraged model can work in boom times but not so much in the current tight credit markets,’ said SIAS Research investment analyst Alan Lok.
Mr Lok added that a handful of other firms are also in a precarious situation because of their high leverage.
As a general rule of thumb, any firm with a net gearing of above 20 per cent should be careful, he said. Investors should also take a careful look at when the loans are maturing, and whether there is enough cash flow.
OCBC’s Ms Chia said Ferrochina’s customers not being able to pay up or a disproportionate slowdown in sales with cooling demand could have contributed to its insolvency.
A source close to the company said that no formal proposal has been received, but the management is seeing more interest from both local and foreign investors after hearing about their shock announcement. It is in talks with a handful of potential investors.
‘The management is careful not to give false hopes, but there are investors who see value in the company and its operations, and might want to come in to help it get back on its feet,’ said the source.
Hong Kong’s South China Morning Post newspaper reported in May that BlueScope Steel, Australia’s largest steelmaker, and Russian companies, including Evraz Group, may be interested in buying 20 per cent of Ferrochina.
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Trading in Ferrochina Stock Halted Indefinitely
Steelmaker was made insolvent after being unable to repay loans
By Yang Huiwen
11 October 2008
Anxious shareholders of Ferrochina are stuck in limbo after trading in the stock was stopped indefinitely yesterday.
Ferrochina was rendered insolvent on Thursday after disclosing it was unable to repay part of its working capital loans of 706 million yuan (S$153 million).
Market observers expect a resolution to take weeks, or even months, so investors will not be able to liquidate their holdings at any price.
It is a dramatic fall for steelmaker Ferrochina, whose shares were once hotly traded by punters, retail investors and fund managers alike.
‘This drains away some confidence in China plays,’ said a remisier who has a few clients with the stock. Some bought in when Ferrochina was as high as S$1.50 and are now staring at six-figure losses.
The shock of its collapse caught out analysts, some of whom have bullish calls on the counter.
OCBC Research is suspending coverage on the company for the time being.
CIMB-GK analyst Lawrence Lye said ‘recent meetings with Ferrochina yielded no inkling of such problems’.
CIMB downgraded the stock from ‘outperform’ to ‘underperform’ and has a new target price of 35 cents - 35.78 per cent lower than its last traded price of 54.5 cents.
OCBC analyst Kelly Chia expects the firm to be valued at between 39 cents and 46 cents a share. This assumes a white knight comes to the rescue and pays a 40 to 50 per cent discount to the firm’s net tangible assets, which stands at 78 cents per share at the first half this year.
Ernst & Young Solutions LLP yesterday was appointed as financial adviser to guide Ferrochina on its restructuring.
‘Given that operations have temporarily been ceased and that interest costs will continue to accrue as time goes by, it is crucial for the company to move quickly to either bring in new money or refinance its loans to stave off liquidation and avoid a deepening of the big hole they are in,’ said DBS Vickers analyst Paul Yong.
Ferrochina’s predicament could be a sign of worse things to come, especially for companies that have gearing issues and need refinancing.
Since its initial public offering in 2005, Ferrochina has borrowed heavily to expand aggressively. Its share price soared to a high of $2.76 in July last year from its IPO price of 50 cents.
‘It goes to show that a highly leveraged model can work in boom times but not so much in the current tight credit markets,’ said SIAS Research investment analyst Alan Lok.
Mr Lok added that a handful of other firms are also in a precarious situation because of their high leverage.
As a general rule of thumb, any firm with a net gearing of above 20 per cent should be careful, he said. Investors should also take a careful look at when the loans are maturing, and whether there is enough cash flow.
OCBC’s Ms Chia said Ferrochina’s customers not being able to pay up or a disproportionate slowdown in sales with cooling demand could have contributed to its insolvency.
A source close to the company said that no formal proposal has been received, but the management is seeing more interest from both local and foreign investors after hearing about their shock announcement. It is in talks with a handful of potential investors.
‘The management is careful not to give false hopes, but there are investors who see value in the company and its operations, and might want to come in to help it get back on its feet,’ said the source.
Hong Kong’s South China Morning Post newspaper reported in May that BlueScope Steel, Australia’s largest steelmaker, and Russian companies, including Evraz Group, may be interested in buying 20 per cent of Ferrochina.
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