Hong Kong's First SPAC Pumps Up With Steel Trader ZG Group

Key Takeaways:

• ZG Group will raise HK$605 million from new investors through its SPAC merger with Aquila Acquisition, valuing the company at HK$10 billion
• The company lost a combined 1.1 billion yuan in the past three years and reported an additional 44.6 million yuan loss in this year’s first quarter 

By Ken Lo 

There’s nothing like a bit of steel to fill your empty shell.

A year and a half after its trading debut as Hong Kong’s first special purpose acquisition company (SPAC), Aquila Acquisition Corp.(7836.HK) announced last Thursday it has finally found a partner to fill its empty publicly traded shell. That partner is ZG Group, which becomes the first real company to be acquired by a Hong Kong SPAC since the city launched its SPAC program at the start of last year.

ZG must still submit a new IPO application to the Hong Kong Stock Exchange, which will require clearance from the China Securities Regulatory Commission. The deal is expected to close in the fourth quarter, after which ZG would officially become a Hong Kong-listed company.

ZG was founded in 2012 as Shanghai Gangfu by Wang Dong, Wang Changhui and Rao Huigang, who set up the company to mainly engage in domestic online steel-trading services. After several financing rounds it previously tried to make a Hong Kong IPO in 2018, but fell short. Under the new merger deal, ZG’s controlling shareholders, led by the three co-founders, will hold approximately 19.1% of the shares and voting rights of the merged company, which will shift from its original dual-class to a single-class share structure.

ZG matches its users, typically steel buyers, with sellers, supply sources and logistics companies, as well as delivery and financing channels. ZG makes its money through service fees for the transactions it facilitates, such as for rendering logistics, warehousing and processing services, as well as financial technology solutions. Its revenue from such transaction fees has fluctuated over the last three years, rising from 150 million yuan ($20 million) in 2021, to 260 million yuan in 2022, only to fall to 186 million yuan last year. The figure totaled 50.8 million yuan in this year’s first quarter.

Nonstop Losses

While its revenue has fluctuated, ZG has been steadier with its consistent string of losses over the past three years, the result of pandemic-related disruptions and weakness in China’s real estate market. Similar to its revenue trends, the company’s net loss narrowed from 456 million yuan in 2021 to a 274 million yuan loss in 2022, only to widen to a 366 million yuan loss last year. Its money-losing ways continued with a 44.6 million yuan loss in this year’s first quarter. 

The company’s fortunes are obviously closely tied to the ups-and-downs of the steel market, which has grappled lately with headwinds from the pandemic and China’s real estate slump. A weaker-than-expected economic recovery in China in the first half of this year put a damper on steel prices, which fell from as high as 4,600 yuan per ton in March to as low as 3,900 yuan by May before recently stabilizing. Prices are expected to average around 4,000 yuan in the second half of this year, down 5.1% year-on-year, as China’s recovery remains weak. That implies ZG might have to boost its economies of scale if it hopes to turn a profit soon.

The company is certainly well positioned to benefit from an industry looking to reduce transaction costs using digital channels. Despite its huge size, supply and demand in China’s steel market are both highly fragmented and decentralized, with multiple layers involved in distribution and limitations in geographical coverage. That explains why costs are often high and efficiency low, amid a broader lack of transparency in the nation’s steel-trade value chain.

ZG’s operations have expanded rapidly since it restructured into a steel-trading platform in 2019. Third-party steel transactions handled on the platform increased from 8.1 million tons in 2018 to 36.2 million tons by last year, representing a compound annual growth rate of 45.4%, according to company announcements. Over the same period, the value of transactions on the platform also grew from 34.9 billion yuan to 162.1 billion yuan last year, representing a compound annual growth rate of 46.8%.

ZG previously completed four financing rounds between 2012 and 2015, public records show. It established another two entities, Pang Mao Finance and Pang Mao Logistics, to help expand its transaction-support services. 

The company needs more capital to boost its scale and transaction volume, hence its latest attempt to tap the financial market. A closer look at its latest finances reveals ZG is struggling to meet its business needs. Its prospectus shows it had 6.36 billion yuan in net liabilities at the end of March, while its cash and cash equivalents totaled 451 million yuan. It recorded a net fund outflow of 83.3 million yuan from operating activities during the first quarter, and has only recorded a net fund inflow from operating activities in the last year.

Unicorn Company

According to its merger agreement, 10 private investment in public entity (PIPE) firms have agreed to pump HK$605 million ($77 million) into ZG Group as part of its listing, with agreements already signed. Terms of that injection will value the company at HK$10 billion.

The PIPE investor group consist of: Xuzhou Zhenxin, Yulong Group, Orient Asset Management, Trafigura Hong Kong, Sichuan Puxin, Ninghai Sincere, Xuchang Industrial Investment, Shanghai Haoyuan, Gold Wings Holdings Ltd. and Zhengzhou Chengxin. Trafigura Hong Kong is a subsidiary of international commodities trading giant Trafigura, while most of the rest are Chinese Mainland companies.

Whether a trading platform racking up losses year after year is worth HK$10 billion, or more than $1 billion, is anyone’s guess, and it will be up to investors to make up their minds. Regardless, the HK$605 million from the PIPE investors, combined with the roughly HK$1 billion in the Aquila’s SPAC custody account, will make ZG’s IPO fundraising the third biggest among all new listings on the Hong Kong Stock Exchange this year.