The deal will transform Angang New Steel into an integrated steel maker, giving it an iron production plant and a hot rolled strip plant. It currently buys its raw materials from the parent.
"Angang will have the ability to control costs through obtaining the upstream assets. We expect prices on iron ore and other raw materials to rise 20 percent in the next 12 months from now," said UOB Kay-Hian analyst Foo Choy Peng.
Angang said it planned to buy assets from its state-owned parent Anshan Iron and Steel (Group), China's second-biggest steel producer.
"The directors believe that an integrated steel production process will enhance the company's competitiveness and profitability as well as enable cost reductions," Angang said in a statement.
The stock fell nearly 4 percent at one point before ending down 3 percent at HK$3.95, in line with a global retreat in steel stocks on concerns about slackening demand in China. It had risen 16.4 percent in the three months to December 29, prior to a trading suspension.
Angang said it would raise about 8.12 billion yuan in a rights issue, offering 8 new shares for every 10 existing shares held at a price of between 3.35 and 3.50 yuan per share.
A total of 2.37 billion rights shares, comprising 1.06 billion state-owned shares, 604.2 million A shares and 712 million H shares, will be issued.
Another 10.28 billion yuan will be raised by an issue of 3 billion new domestic shares.
Shares of many steel companies fell in Asia on Friday after their US counterparts sagged on concerns that slowing Chinese demand could lead to oversupply and drive down steel prices globally.
Steel demand in China has increased only about 5 percent a month recently, down from average increases of 26 percent a month in 2002, 2003 and early this year, according to a Wall Street Journal report on Thursday that cited UBS AG.
Steel production was also on the rise in China, which became a net exporter of steel last month, reversing its position as the world's biggest steel importer in 2003.
"China is becoming more self sufficient, which will increase downward pressure on prices," Midwest Research analyst Brian Rayle said.
Other analysts said concerns about China were overblown.
"Factually, (China is) a net exporter, but that is likely to be a temporary phenomenon," said Charles Bradford of Bradford Research/Soleil Securities.
Bradford said that Chinese steel prices were much lower than international prices in November - a disconnect that has been corrected by subsequent Chinese price increases.
"Asian prices of steel are moving up - that wouldn't be the case if the Chinese were flooding the market," Bradford said.