Lion Group holding percentage

 Cheng’s control via direct cross holdings among Lion Group companies…

 

William Cheng

Ø      Lion Diversified (18.96%+12.21%)

Ø      Lion Industries (14.21%)

Ø      Lion Corp (17.2%)

 

Lion Diversified

Ø      Lion Corp (48.15%)

Lion Corp

Ø      Lion Industries (25.16%)

 

Lion Industries

Ø      Lion Forest (72.88%)

Ø      Lion Diversified (20.85%)

 

What’s NEXT! … dated July 2012

 

Its Megasteel Sdn Bhd, which is Malaysia ’s only flat steel plant, is struggling with cash flow problems that have crimped operations and is bleeding red ink.

 

Its fortunes now hinges on how the government moves in its rationalization plan for the sector. In mid July 2012, the MITI begins dialogues with steel players to discuss the recommendations of The Boston Consulting Group on how best to restructure the sector.

 

In March 2012, Lion Corp was being courted by three international suitors who were keen on buying a piece of the group’s extensive steel operations. Baosteel Group and Fosun Group of China and China Steel Corp of Taiwan had carried out due diligence on the group’s steel mills, which produce both flat and long steel products.

 

Of the three companies, CSC had the best deal on the table, it allowed Cheng to have a say in the operations.

 

The downstream flat steel players – who depend on Megasteel’s HRC to producec CRC – want the import of flat steel to be fully liberalized so that they can stay in the game.

 

They allege that Megasteel’s prices are not competitive and that Lion Group itself is a large producer of CRC and hence a competitor to them. Megastel, contends that it is being hit by imports of HRC from Asean by companies taking advantage of loopholes in the regulations. It proposed that the tariff be raised from 25% to 60% for the long term development of the industry, but MITI shot down the proposal after the downstream players protested.

 

Megasteel’s strongest point for wanting more protection is its dismal finances. Since 2007, it has show a profit of only in 2008. Another huge loss would further deplete its shareholders’ funds, which stood at only rm750 million as at March 31, 2012. Cash and bank balances were just below rm150 million while long term and short term debt totaled rm2.7 billion.

 

The situation was critical 18 months ago (Jan 2011) when trade credit swelled to rm2.5 billion while receivables and inventory were only at rm1.2 billion. But Lion Corp undertook an exercise in 2011 to convert some of the amount owed to creditors into equity, hence reducing the amount to rm2.1 billion as at March 31, 2012.

 

Steel industry officials pointed out that as long as Lion Group does not have a strategic partner or new money in to improve its cost effectiveness, the trade credit will build up again.

 

Towards this end, Lion Group’s officials said that as part of the group’s operational improvement plan, it is keen to collaborative with potential partners who can provide the expertise, technology and experience to help boost its operations, further enhance its quality and increase its market share to ensure its competitiveness in the steel industry.

 

Industry players contend that Megasteel is not competitive because of its high operating costs. The company still uses the electric furnace to product HRC when it is cost efficient to use the blast furnace.

 

The EAF depends on electricity whose rates are likely to go up with tariff hikes while the blast furnace relies on iron ore and coal prices. In Malaysia , we have subsidized electricity, which serves the millers with the EAF well.

 

But for the first time in three years (July 2012), the difference in the output cost of millers using the EAF to produce steel and those utilizing the blast furnace has narrowed. This is because iron ore and coal prices are coming down to normal levels, which makes the blast furnace more efficient.

 

Another industry game changer is the setting up of Brazil based Vale’s iron ore depot in Lumut. At least two integrated steel mill companies – Melawar Industrial Group and Esatern Steel Corp, in which Hiap Teck Venture has a stake – have announced plan to start operations here.

 

Both Melawar Industrial and Hiap Teck are large flat steel customers of Megasteel at the moment.

 

For these companies, the biggest advantage of setting up plants in Lumut would be the huge reduction in the cost of transporting iron ore and hence overall cost.