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 in
  Malaysia, ranked first in terms of trading volume with domestic steel mills in
  2017, having a market share of approximately 20.8%[1].
• Following the PRC’s supply-side restructuring
  to eliminate excess steel manufacturing capacity in 2016 and the implementation
  of protective measures for the domestic steel industry by the Malaysian
  government in April 2017, domestic steel industry in Malaysia has continued to
  make a strong recovery since 2017, which in turn leads to a greater demand for
  scrap ferrous metals from domestic steel mills.
• The Group has been an approved scrap metal
  provider to the Lion Companies�      [2],
  which was the largest steel producer in Malaysia in 2017 with stable and
  significant 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 mill
  operated by it is a project under the cooperation between the Malaysian and the
  Chinese government as part of the Belt and Road Initiative.
• With the implementation of import bans on
  scrap materials in the PRC in the end of 2018, the Group entered into a joint
  venture agreement with Chiho Environmental Group Limited (stock code: 976) (“Chiho”) in January
  2019 to develop a processing facility to provide scrap motor dismantling
  services 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 - Media
OutReach  - 27 February 2019 - Heng Hup Holdings Limited (“Heng Hup
Holdings”, together with its subsidiaries, the “Group”; stock code: 1891), a leading scrap ferrous
metal trader in Malaysia, announces the details of its plan to list on the Main
Board of The Stock Exchange for Hong Kong Limited (“SEHK”) today.

A total
of 250,000,000 shares will be offered under the Share Offer, of
which 225,000,000
Shares (subject to reallocation and the Over-allotment Option) or 90%, will be
offered 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 and
not more than HK$0.62.
The Public Offer will commence at
9:00 a.m. on 27
February 2019 (Wednesday) and close at 12:00 noon on 4 March
2019 (Monday). The final offer price
and allotment results
are expected to be announced on 14
March 2019 (Thursday).
Dealings in shares of Heng Hup Holdings on the Main Board of the SEHK are
expected to commence on 15
March 2019 (Friday).

Assuming
an Offer Price of HK$0.56
per Offer Share
(being the midpoint of the Offer Price range), the aggregated net proceeds from
the Share Offer, after deducting related expenses, will be approximately HK$94.3 million. Heng Hup Holdings intends to use these net proceeds for the following
purposes: 1) approximately 8.8% will be used
for partially replacing its fleet of trucks; 2) approximately
7.1% will be used for enhancing its
processing 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 new
scrapyard in the east coast of Peninsular Malaysia; 5) approximately
15.6% will be used for expansion of its scrapyard in Selangor; 6) approximately
45.1% will be used as its working capital for its scrap ferrous metal trading business; and 7) approximately
10.0% will be used as its general working capital or for other general
corporate purpose (excluding the purchase of scrap materials).

Shenwan
Hongyuan Capital (H.K.) Limited is the Sole Sponsor. Elstone
Securities Limited and Shenwan Hongyuan Capital (H.K.) Limited are the Joint
Global Coordinators. Elstone Securities Limited, Shenwan Hongyuan Capital
(H.K.) Limited, Haitong International Securities Company Limited and SPDB
International Capital Limited are the Joint Bookrunners and the Joint Lead
Managers.

Industry Overview

Following the PRC’s supply-side restructuring to
eliminate excess steel manufacturing capacity in 2016 and the implementation of
protective measures (such as imposing additional import duties on steel
products) for the domestic steel industry by the Malaysian government in April
2017, the domestic steel industry in Malaysia has continued to make a strong
recovery since 2017 which, in turn, leads to a greater demand for scrap ferrous
metals from domestic steel mills to satisfy their production needs.

As steel producers are ramping up their production
capacity in Malaysia, domestic steel production is expected to increase further
from 2018 to 2022 to meet the growing demand from downstream industries, which
will drive the use of scrap ferrous metals as raw materials for production. The
sustained economic growth together with a rise in both consumption and
production for steel is expected to drive the domestic supply of scrap ferrous
metal 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 is
anticipated to grow at a CAGR of 9.7% from 2018 to 2022.

In
addition, the used
batteries traded in Malaysia is expected to grow at a CAGR of 11.0% from 2018
to 2022. For the waste paper market, supported by the government incentives for
resources recycling and rising demand for consumer goods, the volume of waste
paper traded in Malaysia are forecasted to rise at a CAGR of 10.8% from 2018 to
2022.

Business Overview

According to Frost & Sullivan, the Group ranked
first in terms of trading volume with domestic steel mills in 2017, having a
market share of approximately 20.8%. Over the years, the Group has established
a nationwide supplier base of feeder yards from which it sources recyclable
scrap ferrous metals for sales to steel mills in Malaysia. The Group also
operates three scrapyards equipped with the processing machinery mainly for
ferrous metals strategically located in areas where the availability of scrap
ferrous metals can be assured and nearby its steel mill customers in the states
of Selangor, Melaka and Johor, with an aggregate land area of approximately
35,000 sq.m.. In addition, supported by a fleet of 33 self-owned trucks among
which, 18 are trucks with laden weight of 20 tonnes or above as at 19 February 2019 (the “Latest Practicable
Date“), it can always respond to the logistics needs of
its small and medium-sized suppliers, who have only limited logistics support,
on a timely basis.

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

Competitive Strengths

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

In the scrap trading business, the Group needs to
have sufficient working capital to operate as it is always required to settle its
purchases well before it receives sales proceeds from its customers. Directors
also consider the Group’s leading position in the industry has raised its
profile in the market which facilitated it to source scrap ferrous metals from
various suppliers who often prefer to trade with buyers possessing the
financial resources to settle trades readily.

 

2)    Its executive
Directors and sourcing team possess extensive scrap ferrous metal trading
industry experience.

The combination of extensive operational expertise
and in-depth knowledge of scrap ferrous metal trading industry have enabled its
Directors to secure and develop sustainable business strategies, assess and
manage risks and capture profitable opportunities. Its sourcing team
communicates with its suppliers daily to assist their daily operations and
proactively explores new sources of supply of scrap materials to strengthen the
Group’s supplier network.

 

3)    The Group’s
scrapyards are strategically located in the areas where the availability of
scrap ferrous metals can be assured and nearby its steel mill customers.

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

 

4)    The Group
possesses its own fleet of trucks to serve its suppliers

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

 

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

The Lion Companies accounted for over 90% of the Group’s revenue attributable
to the sale of scrap ferrous metals during the Track Record Period. Having the
largest steel producers in Malaysia as its customer, the Group enjoys a stable and significant business flow which has
raised its profile in the market and enabled it to establish a nationwide
network of suppliers.

 

BUSINESS STRATEGIES

1)    Partially replace
its fleet of trucks

As scrap ferrous metals are bulky and heavy and the
source is highly localised and scattered across Malaysia, the Group usually
needs trucks to pick up scrap ferrous metals from its
small-scaled suppliers to its scrapyards; and to deliver scrap ferrous metals
from its scrapyards/ third-party scrapyards in larger scale to steel mills. The
Group intends to utilise approximately 8.8% of the net proceeds of the Share
Offer to purchase 12 new trucks.

 

2)    Enhance its
processing abilities

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

 

3)    Set up its
enterprise resources planning system

Given the favourable backdrop of the steel industry
for domestic steel mills in Malaysia, the Group believes its business will
continue to grow and the amount of transaction data and financial records to be
processed will also increase. Therefore, the Group intends to utilise
approximately 2.3% of the net proceeds of the Share Offer to set up its own
enterprise resources planning system which would enable it to process such data
and records on a timely basis, to improve its operational efficiency and to
reduce its administrative costs in the long run.

 

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

The Group has started to sell
scrap ferrous metals to Alliance Steel (M) Sdn. Bhd. since April 2018. The
Group believes the new scrapyard can increase the supply from the state of
Pahang and reduce its reliance on the scrap ferrous metals supply from the
states 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 Johor
to the steel mills nearby to minimise transportation costs and improve the
delivery efficiency. The new scrapyard is expected to commence operations in
July 2019 and the maximum annual processing capacity of the new scrapyard is expected
to be 72,000 tonnes of scrap ferrous metals. The Group intends to utilise approximately
11.1% of the net proceeds of the Share Offer to set up this scrapyard.

 

5)    Expansion of its
scrapyard in Selangor

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

 

 

6)    Working capital
for its scrap ferrous metal trading business

As the trade receivables turnover days is generally
longer than the trade payables turnover days, the
Group requires cash flows to settle with its
suppliers in advance of the receipts of proceeds from its customers. If the
Group’s sales volume increases, the Group’s demand for working capital will
rise as well. The Group intends to apply 45.1% of the net proceeds of the Share
Offer as additional working capital for its scrap ferrous metal trading
business.

About the Group

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

 

For the years ended 31 December 2015, 31 December
2016, 31 December 2017 and the eight months ended 31 August 2018, the Group’s
revenue amounted to RM429.6 million, RM378.5 million, RM739.4 million and
RM568.8 million, respectively.