The sale, which was completed after the market closed yesterday, comes after the stock has dropped almost 18% since the company reported lower-than-expected 2007 earnings on April 7. However, some analysts argue that the current low valuation is a good buying opportunity, which may explain the investor interest in the placement. The outcome suggests that they still sought as big a discount as possible though.
According to a source, the deal came together quickly thanks to several large orders and Citi, which was the sole bookrunner, was able to close the book after just two hours. About 30 investors, representing a good mix of long-only and hedge fund accounts, came into the deal, which was comfortably covered.
However, the price was fixed at the bottom of the HK$13.08 to HK$13.20 range for a discount of 6% to yesterdayÆs closing price of HK$13.92. At the top of the range, the discount would have been 5.2%.
The offer comprised 56.69 million shares, which is equal to a 2.5% of the company and represented the sellerÆs entire stake. It is also the equivalent of seven daysÆ trading volume based on the daily average over the past three weeks. Given the high day-to-day volatility in the Hong Kong stockmarket, such a volume would be risky to sell directly in the market and yesterdayÆs undisclosed seller is one in a long line of institutional investors over the past couple of months that have opted to enlist a bank and offload their shares through a discounted block trade instead.
The same volatility means investors also prefer to err on the cautious side and yesterdayÆs trade shows that many still demand a fairly sizeable discount to increase their exposure.
ôInvestors want as much downside protection as possible in case the market takes another downward turn,ö says one banker.
The Hang Seng Index gained 2.8% on Thursday and Friday last week, but gave up all those gains when it tumbled 3.5% on Monday. Yesterday the index rose a modest 0.4%. Cosco Pacific has been on a largely downward trend over the past six months, falling as much as 53% from a closing high of HK$26.15 in October to a recent low of HK$12.38 on March 20. The rebound that followed after that and which took the share price back towards HK$17 was interrupted after the earnings release. The earnings prompted recommendation downgrades from ôbuyö to ôholdö or ôneutralö by a few investment banks, including Deutsche Bank and Goldman Sachs which both cited weakness in the companyÆs container leasing unit as the key reasons for their concern.
However, as a result of the sharp drop in the share price over the past week, their reduced target prices of HK$18.10 and HK$17.50 respectively, are still well above the current share price and suggest a potential upside of up to 30% from yesterdayÆs close û or more than 38% if based on the discounted placement price.
Indeed, in a research note published yesterday, Core Pacific û Yamaichi analyst Roslyn Ji argued that the downside for the stock is limited since it is currently trading at 2008 price-to-earnings ratio of 11 times û close to its trough valuation of 10 times rolling P/E over the past four years. The peak valuation in the same period is 22 times. Ji maintains a ôbuyö recommendation and has a target price of HK$18.90, which is equal to 16 times her earnings forecast for 2008.
Cosco Pacific reported a 47% increase in net profit for 2007 to $423 million, but a large portion of that was derived from one-off gains from the sale of containers and its stake in Chong Hing Bank and a fair value gain on its stake in Shenzhen-listed container manufacturer CIMC. The core profit fell 2.3% year-on-year to $256 million and the container leasing unit suffered a 32% decline.
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