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Morgan Stanley sells its remaining stake in Shanshui Cement

World Cement,

Morgan Stanley has sold its final 8.8% stake in China Shanshui Cement for HK$1.73 billion (US$222 million), taking advantage of a recent rally in the Chinese cement producer's share price. The US bank has held shares in the company since 2008 through its private equity unit, MSPE, and has been made numerous sell-downs since April 2009.

The MSPE sold 246.7 million shares, which represents 8.8% of Shanshui's issued share capital, at a price of HK$7.01/share. After the Hong Kong market closed, the sale was completed through an accelerated deal and it accounted for 15 days’ worth of trading volume. Morgan Stanley was the only bookrunner.

Shanshui, which is based in Shandong province in eastern China, recently announced its 2010 results, where the good news rallied the share price by 7%. At the time of the deal, the stock was up by 31%.

The company, which is based in Shandong province in eastern China, posted a net profit of CNY979 million (US$149 million) for 2010, up 39.6% from the previous year. There was also an increase of 40% in basic earnings per share, from last year’s CNY0.35.

Other investors for the stock, similar to previous occasions, were not put off by MSPE’s sell-down, and the stock closed 1.9% higher the following day. At every MSPE sell-down the price has been higher than at the previous one.

In April 2009, MSPE and a fellow pre-IPO investor, CDH China Fund offloaded 265 million shares at HK$3.78/share, gaining US$129 million. Following a 25% gain in the share price in the subsequent three months, MSPE sold off another US$80 million worth of shares in July 2009 at a price of HK$4.96/share.

In the most recent deal, MSPE and CDH were happy to part with a further 240 million shares, worth US$170 million in September 2009. 180 million of these shares came from MSPE, leaving Morgan Stanley with the 8.8% stake that it has now sold.

Currently, Shanshui is trading at a price-to-earnings (P/E) ratio of times 17.9, significantly lower than the other two key cement players in China. China Resources Cement is quoted at a P/E multiple of 24.6 times and Anhui Conch Cement at 23 times. Hong Kong-listed Asia Cement (China), the mainland Chinese arm of Taiwan's Asia Cement, is trading at 12.6 times.

Lately, China has ordered outdated vertical kilns, mainly used by small, rural cement producers, to be closed, in order to reduce pollution and improve energy efficiency. Bigger players such as Shanshui have viewed this as an opportunity, and have actively taken part in the market consolidation, both through organic growth and acquisitions in northeast China.

According to a Shanshui statement, in 2010, a total of 91.55 million t of outdated cement production capacity was eliminated, and in the past five years, an accumulated amount of 434 million t of obsolete clinker production capacity has been closed down.

As a result of the increasing demand for cement in combination with a slowdown in new production capacity and the elimination of a large number of obsolete cement plants, cement prices have been picking up in industry-intensive areas in some provinces, including Shandong, resulting in higher profit margins for some of China's leading cement companies, Shanshui said.

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