Thursday, 28 July 2011

Hiap Teck goes Upstream

Hiap Teck, a company mainly involved in trading and manufacturing of downstream steel products such as pipes & tubes, is preparing to expand its business upstream by starting an integrated steel mill in Kemaman, Terengganu. 

Hiap Teck's 55% owned Eastern Steel on 22nd July entered into a construction contract with China Shougang International Trade and Engineering Corp for the construction of the steel mill.

In Dec 2009, Hiap Teck bought 55% of Eastern Steel, which is then a dormant company with 242.8ha of land in Kemaman for RM110mil. The recently resigned MD and founder of Hiap Teck, Kua Hock Lai slowly disposed his shares to Datuk Law Tieng Seng, who owns 90% of Eastern Steel before it was sold to Hiap Teck. Now Kua only holds 7.8% and Law has 27.6% of Hiap Teck's share.

    Downstream steel product

Venturing into upstream business should be a good move, but it has risk as well. This project will cost RM754mil and is expected to start construction work in Dec11/Jan 12. The completion date is 18 months later and the production is expected to start 3 months after completion, which should be end of 2013.

For such a huge project, Hiap Teck will fund it by proposed rights issue of 321,900,000 new ordinary shares  + 80,490,000 free warrants (1:4), private placement of 32,196,000 new shares (10%), RM180mil bond issue and ESOS. After all these exercises, Hiap teck's share capital will balloon from 327,400,000 to 777,224,000!

     A steel mill

The dilution of earning is not helped by recent poor financial performance, in which Hiap Teck registered a drastic drop in both revenue and profit.

Profit (RM mil) Q1 Q2 Q3 Q4 Total
2010 17 4 17 13 51
2011 -1 4 5

The disappointing set of results is said to be due to lower sales and higher material cost.

Affin and OSK have downgraded Hiap Teck recently to SELL, with target price of only 70sen and 95sen respectively. Hiap Teck is currently trading around 98sen.

Two weeks ago Hiap Teck's share price surged from RM0.915 to RM1.16 (27%) in just 5 days impending the announcement of this new venture. However, it has since fallen rapidly to below RM1. As current world market sentiment is bad, it may drop further.

The steel mill will not contribute any earning to Hiap Teck til 2014. It will only contribute debt and dilution at the moment. If the 4Q2011 results is still poor, then its share price might be in trouble. However, if the steel mill project is successful, Hiap Teck should have a bright future. 

If the share price drops to or near 90sen level, it may be interesting to "play" it, KIV another surge.

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