(Bloomberg) -- Hong Kong bears have found a new target as the city’s stocks trade near their highest in 10 years: one of China’s most indebted cement makers.
Short interest in China National Building Material Co. tripled to a more than four-year high of 12.9 percent on Sept. 14 from just 4 percent a week before, according to data compiled by IHS Markit Ltd. and Bloomberg. The ratio remained elevated at 10.6 percent Tuesday, making it one of the most shorted stocks from more than 2,000 in Hong Kong.
Bearish bets surged after government-controlled China National Building and China National Materials Co., known as Sinoma, said on Sept. 8 they planned to combine, triggering a rally in their share prices. The merger would create the world’s largest cement producer with 520 million tons annual capacity, according to Bloomberg Intelligence.
The deal, however, is by no means done.
“People are worried about this,” said Sean Xiang, a Shenzhen-based analyst at Guotai Junan Securities Co. “It is a showcase of China’s SOE reform, but it is likely that it will not win approval, or at least not so easily.”
The merger is pending Sinoma shareholders’ approval and will only proceed if 75 percent of votes support it and no more than 10 percent are against. The proposed consideration represents 0.72 times price-to-book valuation, well below the industry average, according to Bloomberg Intelligence analyst Michelle Leung.
Emails sent to China National Building and calls to its investor relations department weren’t answered.
“The bargaining power of Sinoma independent shareholders is not small,” said Chi Man Wong, a Hong Kong-based analyst at China Galaxy International Financial Holdings. It’s possible that some may ask for the deal to be sweetened as the benefits remain to be seen, he said.
Investors are also doing more hedging to protect their recent gains, Wong said. Shares of Sinoma and China National Building have rallied 26 percent and 10 percent, respectively, in Hong Kong since the merger was announced.
Vincent Yu, a Shanghai-based analyst at SWS Research Co., upgraded China National Building after the plan was made public, saying the merger could help ease the company’s debt burden and enhance its credit rating.
China National Building is the nation’s second-most indebted cement maker, according to Bloomberg calculations, with a gearing ratio above 270 percent, behind the troubled China Shanshui Cement Group Ltd.. That company’s stock has been suspended from trading in Hong Kong since April 2015 amid a management battle for control.
China’s cement prices have rallied this year as the government’s anti-pollution campaign led to production cuts at factories. A gauge tracking the nation’s cement prices is close to its highest level since 2014, and brokers from Morgan Stanley to China Merchants Securities Co. expect prices to rise further thanks to the capacity cuts.
Guotai Junan’s Xiang suspects the outlook for cement prices isn’t so rosy after recent data. Property investment growth slowed in August, while new home sales in Beijing and Shanghai tumbled during the National Day holidays. Given its indebtedness, China National Building is particularly vulnerable to changes in sentiment, he said.
(Updates ratio in second paragraph and share price moves in ninth paragraph.)
--With assistance from Kana Nishizawa
©2017 Bloomberg L.P.
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