The Chinese steel-trading platform is applying to trade on the Hong Kong stock market after merging with its shell company partner.

The Chinese steel-trading platform is applying to trade on the Hong Kong stock market after merging with its shell company partner

Key Takeaways:

  • The deal between Aquila Acquisition and ZG Group has a negotiated value of up to HK$10 billion
  • ZG’s cash and cash equivalents were just 129 million yuan at the end of January


By Fai Pui

Steel-trading platform ZG Group is set to forge a new route to the Hong Kong stock market via a SPAC deal.

Two years after the market welcomed special purpose acquisition companies (SPACs), ZG Group and Aquila Acquisition Corporation (7836.HK) are the first in line to launch their merged business as a publicly traded company. The move, if successful, could liven up an otherwise languishing SPAC market.

A listing application was filed withthe Hong Kong Stock Exchange on March 10, nearly seven months after Aquila, a shell company formed by CMB International Asset Management and an investment consortium, revealed plans to acquire the steel-trading marketplace. Through a kind of reverse takeover, or de-SPAC, ZG Group would shed its shell and trade on the stock market in a deal worth up to HK$10 billion ($1.28 billion).

Aquila was Hong Kong’s first SPAC listing in March 2022 and is now on track to notch up the first successful de-SPAC. Back in August last year, the investment vehicle predicted that the deal to fuse with ZG would close in the fourth quarter. But with the Hong Kong stock market in a slump, the process went quiet pending a green light from the Chinese securities authorities. Regulatory approval must have been granted in the meantime, clearing the way for this month’s formal de-SPAC application.

SPACs, which first became popular in the United States, are publicly traded vessels that use their cash to buy promising private companies and take them public. The investors who get on board are relying on the shell company and its advisers to identify viable targets and to complete the mergers within a defined time frame.

Using the SPAC process, ZG Group is making a second attempt to go public in Hong Kong after a failed independent effort in 2018.

Recent years have been hard going for ZG. The online steel-trading forum was 274 million yuan ($38 million) in the red in 2021 and sank deeper into negative territory over the next two years, when it posted losses of 366 million yuan and 469 million yuan. Over the three-year period, total losses reached 1.11 billion yuan, blamed on a shift to becoming an “asset light” company, as well as investments in digital infrastructure and building up a sales force.

In 2022 the earnings performance was marred by the Covid pandemic, the company said. The loss widened by around 28% in 2023, swelled by 343 million yuan in one-off equity-based outlays and 39.6 million yuan in fees related to the SPAC deal. Excluding those two items, the net loss for 2023 was 83.6 million yuan, around 77% less than in the previous year.

Demand for Chinese steel is always strong, but the market is highly fragmented, in terms of both suppliers and buyers. The challenges are compounded by geographic scale, complex distribution channels, high transaction costs and limited transparency. For that reason, the industry has been trying to take advantage of digital platforms to improve efficiency and trim transaction costs. ZG seized the digital opportunity, becoming the biggest third-party steel trading platform in the world in 2022, measured by traded tonnage. The company is also expanding its business to other industrial products apart from steel, such as electronic components, electrical equipment and electrical hardware.

Transaction volume has grown since the platform launched in 2019, reaching 35.3 million tons last year, or about 38% of the steel traded online through third-party sites in China. The company’s total transacted tonnage rose from 35.6 million tons in 2021 to 49 million tons in 2023, a compound annual growth rate of 17.3%. Gross merchandise volume (GMV) also increased from 187.2 billion yuan in 2021 to 195.5 billion yuan last year. By the end of last year, the platform had connected more than 12,600 registered sellers and more than 177,000 registered buyers, most of them small and medium-sized enterprises, the company said.

ZG’s founder and CEO, Wang Dong, worked in education and electronic gaming before entering the steel industry in 2008. He found that the steel buying process was overly complicated, requiring the purchaser to seek, compare and negotiate prices to clinch a deal. The paperwork for payment and settlement was also a challenge, as invoices had to be issued after a sale. Initially, Wang wanted to emulate the flight search service Qunar, helping buyers to identify and acquire goods more easily than under the old system. The platform ZG.com developed from there.

Multiple financings

Along with two partners, Wang founded Shanghai Gangfu, ZG’s predecessor company, in 2012. In the same year, the company completed an A-Series financing, followed by another five rounds between 2013 and 2018, netting nearly 2.53 billion yuan in total. With the capital infusions, the company’s valuation increased exponentially from 30 million yuan to 7.93 billion yuan.

As a public company ZG will adopt a dual class share structure. Founder Wang Dong and one of his partners, Wang Changhui, will command about 65.7% of the voting rights between them, while concerted parties including the founder and Wang Changhui would control about 66.9% of the rights.

To keep expanding the company would need to invest more capital. But its current liabilities reached 11.3 billion yuan at the end of last year, according to the prospectus document, and the company’s cash and cash equivalents amounted to just 129 million yuan at the end of January. The company expects to get up to 959 million yuan from the Aquila deal, with plans to spend about a quarter of the proceeds on digital upgrades to improve supply services. Another 20% will go towards widening the buyer base and promoting customer loyalty. The company said a further 20% would be used to strengthen its technology portfolio, and about 25% was earmarked for exploring cross-industry expansion.

Only five SPACs have been launched in Hong Kong since the exchange allowed the listing of shell companies. The SPAC process in Hong Kong differs from the system in the United States or Singapore, with more stringent requirements for sponsors and institutional investors. The five SPACS all listed in 2022 and were given two years to find acquisition targets. That means the clock is ticking and will run down at the end of this year.

Aside from Aquila, the Hong Kong-traded SPACs are Vision Deal (7827.HK), HK Acquisition Corporation (7841.HK), Interra (7801.HK) and TechStar (7855). Vision Deal announced plans late last year to acquire Chinese social media platform Quwan Group for HK$8.2 billion, becoming the second SPAC after Aquila to name an M&A target. The other three have yet to specify any plans.

Investors may wonder if a price tag close to HK$10 billion is rather high for a company that has lost more than 1.1 billion yuan in three years. But if ZG does manage to navigate its way to a backdoor listing, it will certainly generate some ripples in the otherwise still waters of the SPAC market.

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