Investors Resist Pull of Chinese Rare Earth Magnet Maker JL Mag

HONG KONG — A major Chinese manufacturer of rare earth magnets for electric vehicles, wind power generators and energy-efficient air conditioners made an underwhelming debut on the Hong Kong stock market on Friday despite being a key player in a red-hot sector.

JL Mag Rare-Earth produces magnets from an alloy of neodymium, iron and boron known as NdFeB. The Jiangxi Province-based company leads this market, holding a 14.5% global share as of 2020, according to U.S. research consultancy Frost & Sullivan.

Growing environmental concerns and the global policy push for low-carbon emissions have helped the company expand. Revenue for the first six months of 2021 totaled 1.76 billion yuan ($277 million), up 93% on year, while net profit increased 140% to 220.34 million yuan.

This year, revenue is projected to reach 5.84 billion yuan with net profit almost tripling to 683 million yuan, according to estimates from three Chinese brokers surveyed by QUICK-FactSet.

Despite these strong numbers, trading opened on Friday at HK$30.80, 9% below the Hong Kong share sale price of HK$33.80. The stock glided further down as a virtual opening-bell ceremony played on the Hong Kong Stock Exchange’s website, going as low as HK$28 before ultimately closing just above that level.

JL Mag’s Shenzhen-listed shares also slipped, dropping 1.4% to 37.68 yuan.

Omens indicated that JL Mag would get off to a weak start in Hong Kong. The share sale was priced at the bottom of the marketed range, reflecting tepid demand. On premarket trading Thursday on a platform run by Phillip Securities Group, the shares fell to HK$27.85.

The share sale raised HK$4.24 billion ($544 million) for the company, though it could expand that by exercising an option to upsize the sale.

Most of the money will be used for a new factory in the eastern city of Ningbo expected to open by the end of 2023 as well as the purchase of machinery and equipment for use at the company’s existing production site in the city of Ganzhou.

Ahead of Friday’s debut, investors commenting online were pessimistic, noting that the Hong Kong offer price was relatively close to the Shenzhen price, after the latter slipped during the share sale process.

“It’s not that we are not appreciating the company’s fundamentals, but it is the discount compared to its A-share which is not attractive,” said one on a discussion forum operated by Snowball Finance.

Due in part to China’s capital controls, shares that are listed both domestically and offshore usually trade at a significant premium on the mainland. The Hang Seng Stock Connect China AH Premium Index, which tracks the price differential for dual-listed shares, showed a 41.7% premium for the domestic A-shares as of Thursday. JL Mag’s Shenzhen shares closed Thursday 28% above its Hong Kong offer price.

But JL Mag’s basic business and its outlook are generally viewed as positive, especially considering booming demand for environmentally friendly vehicles.

The company already supplies magnets to major carmakers including Tesla and General Motors as well as fast-growing Chinese electric vehicle producers such as BYD, Nio and Li Auto. In December, JL Mag added Nidec, a major Japanese producer of electric motors, to its growing list of customers.

“NEV is the main market that we are aiming at,” Cai Baogui, JL Mag’s co-founder and chairman, told reporters during an online meeting last week. He stressed that JL Mag is “investing extremely heavily in research and development” to capture the opportunity in this sector. Chinese Rare Earth Magnet Maker

The company also is seen as benefiting from tacit political support, an essential asset for doing business in China.

President Xi Jinping chose JL Mag’s factory in Ganzhou for his first stop during a tour of Jiangxi Province in May 2019. State-owned Xinhua News Agency said Xi’s visit signified the importance attached by top leadership to the development of the rare-earth industry and the upgrading of Chinese industry in this strategic area.

China is the world’s largest producer of rare-earth metals. As technological competition with the U.S. intensifies, the importance of these metals and products derived from them will only increase. JL Mag was apparently selected to be the model case of creating value-added products from these strategic minerals.

The company received explicit government support for its Hong Kong listing as well. The five cornerstone investors who bought up nearly half the shares offered in Hong Kong include the China State-owned Enterprises Mixed Ownership Reform Fund and affiliates of state conglomerates China Resources (Holdings), CITIC and China Merchants Group. The other was an affiliate of Chinese private equity company Hillhouse Group. Chinese Rare Earth Magnet Maker

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