CR Gas shares change hands at 21.5% discount

For the second time in just two months, a block of shares in Hong Kong-listed China Resources Gas Group was in the market last night as Credit Suisse and Morgan Stanley sold the rest of their combined stake in the Chinese gas distributor, raising HK$763.6 million ($98.5 million). The discount was even wider this time -- above 20% -- which reflects a sharp rise in the share price since the previous sale and also suggests that the sellers were keen to get rid of the stock.

The two investment banks acquired the CR Gas shares at a price of HK$3.42 per share in August last year in an attempt to help the company increase its free-float. Parent company China Resources Holdings had ended up with too many shares following an asset injection into CR Gas (at the time called China Resources Logic) which was funded by a rights issue. Credit Suisse and Morgan Stanley hedged the purchase of the shares by entering into a share swap agreement with China Resources Holdings, which indicates that they haven't actually been benefitting from the share price gains -- at least not in full.

The two banks sold a first batch of 100 million CR Gas shares on April 7, raising $46 million, and last night, after the expiry of a 60-day lockup, they put their remaining 166 million shares up for sale through a self-led placement.

The shares, representing an 11.7% stake in the company, were offered at a price between HK$4.30 and HK$4.60, which translated into a hefty discount of 21.5% to 26.6% versus yesterday's close at HK$5.86. Outside the rights issues, this is the widest discount on any Hong Kong equity trade this year, and naturally attracted quite a bit of buying interest. But thanks to a 31% jump in CR Gas's share price since April 7, yesterday's selling price was still 35% above the HK$3.60 per share that they achieved in the previous sale. That trade was priced at the bottom of the indicated price range for a 19.3% discount to the market price at the time.

Last night, the final price was fixed at the top of the range at HK$4.60 for a 21.5% discount. One source noted that a wide discount was needed because of the thin trading volume in the stock -- last night's transaction accounted for an entire year's worth of trading volume (335 days) based on the daily average for the past 30 days, even though this is now a $1 billion market cap company. But CR Gas is also trading at a much more expensive valuation than its peers and some investors may thus have needed an additional incentive to buy the shares.

Either way, the tactic appears to have worked as the deal attracted strong institutional interest from both long-only accounts and hedge funds and the order book was several times covered when it closed. While it remains to be seen what effect the discount will have on the share price in the secondary market today, the lack of liquidity should help limit the decline.

Last time, the share price fell 7% the day after the placement, but recovered all of that the following day.

Aside from the discount, this placement would have been slightly more attractive to investors than the first one since it removes the overhang caused by the knowledge that Credit Suisse and Morgan Stanley were not long-term holders of the stock. However, in hindsight, it doesn't seem like this has had much negative impact over the past couple of months.

According to the source, the recent gains have left the stock trading at more than 25 times its projected earnings for 2009 and even the discounted placement price values it at a price-to-earnings multiple above 20. This compares with less than 15 for the rest of the sector, he said, noting that Xinao Gas is currently trading at a 2009 P/E ratio of 14.8 times while China Gas is quoted at 14.6 times. One reason for this valuation gap appears to be an expectation that the parent company will inject more assets into the Hong Kong-listed unit.

That said, CR Gas's share price is still a long way from the levels above HK$15 where it traded in November 2007, before the economic downturn started to push the equity markets lower.

Lumena and Yingli

The placement came as the Hong Kong stockmarket edged lower for the second session in a row, showing continuing signs that the rally that began in mid-March may be ready to pause. However, there was also good news for investors focusing on primary market issuance, as Lumena Resources gained 19% in its trading debut yesterday. The stock closed just 1 HK cent off its intraday high and saw heavy turnover with 557 million shares, equal to 96.5% of the IPO size, changing hands.  

This was in sharp contrast to the other three new listings in Hong Kong this year, which all fell on their first day of trading. Market observers say it appeared institutional investors were trying to increase their holdings in Lumena after their orders in the initial public offering were scaled back. The specialty chemicals company, which focuses on the production of thenardite -- an important raw material in powder detergents, dyes, textiles, glass, kraft pulp and pharmaceutical products -- raised $149 million in the IPO and the 90% institutional tranche was more than five times covered.

Meanwhile, Yingli Green Energy Holding Company, a Chinese integrated solar power company listed in the US, was also in the market overnight with a placement of about $200 million worth of American depositary receipts. The deal, which was due to price after the US close, comprised 12.5 million new ADRs and 3 million existing ones offered by chairman and CEO Miao Liansheng, for a total offering size of 15.5 million ADRs. The new stock accounts for about 9.8% of the company.

While placements marketed during trading hours tend to put downward pressure on the share price, Yingli's shares actually rose in overnight trading. At one point the stock was up as much as 9.4% from the previous day's close of $13.16, but retracted in the second half of trading and finished the session 1.3% higher at $13.33. The overall market fell and the Dow Jones index lost 1.25%.

The buying support for Yingli was likely prompted by a company update about its business developments in China issued after the close of trading on Monday, in which it said it has signed an off-grid photovoltaic (PV) system sales agreement with the Shanxi subsidiary of China Mobile and has been selected by Huawei Technologies to supply PV modules for its base stations. The value of the two contracts wasn't disclosed.

Chairman Miao also noted that the company has experienced "a substantial increase in demand since the start of the year and expect to see at least a 70% increase in shipments in the second quarter" over those in the first quarter. Together with Yingli's competitive cost structure and lower prices of polysilicon both in the spot market and under the company's long-term supply contracts, this should enable it to achieve its previously stated second quarter gross margin target of 18% to 20%, Miao added.

Deutsche Bank, Credit Suisse and Citi are joint bookrunners for the Yingli placement.