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

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.