Yurun placement triggers heavy sell-off

Hong Kong-listed China Yurun Food Group dropped 12% on Friday after a placement of new and existing shares that raised a combined HK$2.65 billion ($341 million).

Market watchers said the sell-off, which pushed the share price well below the placement price, was a sign that investors are getting a bit fatigued after two weeks packed with follow-ons and block trades. In light of this and the fact that the deal was quite punchy in relation to the daily trading volume, some argued that the Yurun placement was too aggressively priced -- even though the final price was fixed at the bottom of the range. According to Kim Eng analyst Jacqueline Ko, the pork meat processor also ruled out a share placement only a week earlier, and the fact that it went ahead anyway would not have gone down well with existing investors.

However, sources said the deal was fully placed with about 70 accounts, including a couple of long-only funds that already held shares in the company. Some US investors did also participate, but the number was smaller than would normally be the case, which one source said was likely a reflection of the high valuation. The deal, which was arranged by Morgan Stanley and UBS, comprised 200 million shares, of which 130 million were new. The remaining 70 million were sold by a company owned by chairman Zhu Yicai and his wife. The shares, together accounting for about 23 days' worth of trading volume, were offered at a price between HK$13.23 and HK$13.73, which corresponded to a discount of 4% to 7.5% versus Thursday's close of HK$14.30.

As noted earlier, the deal was priced at the bottom end of that range for a 7.5% discount. This was wider than the 6% discount fetched on a Yurun sell-down by an unidentified institutional seller three weeks ago, although that deal was a lot smaller at only $106 million. And since it involved no new shares, the earlier deal also resulted in no dilution for existing shareholders. The 130 million new shares sold last Thursday accounted for 8.45% of the issued share capital.

The chairman's stake will fall to 36.2% after the deal from close to 44% beforehand and both he and the company have committed not to sell any more shares over the next six months.

One source noted that the previous placement was likely helpful as the bookrunners would have been aware of at least some international accounts that were interested in buying more shares. UBS acted as bookrunner on both deals. Also, investors who bought shares in the earlier deal had already made a paper gain of 22% as of Thursday's close when the latest deal was launched. This may have made them keen to add to their holdings.

While on an upward trend, Yurun has underperformed the H-share index since it released its full-year 2008 results in March on account of disappointing numbers and falling pork and hog prices -- and also because many of the stocks in the index are more cyclical than Yurun and have been riding on hopes of an early pickup in global demand. However, after Yurun's annual general meeting on June 22, chairman Zhu told the assembled media that he was "fairly confident" about the business outlook as pork prices bottomed out in May and have been on a rising trend since mid-June. This allowed Yurun's share price to perk up and last Thursday (the day of the deal) the stock closed at a 12-month high. Analysts too expect hog and pork prices to be heading higher from here and 20 of the 26 analysts who cover the company now have a buy recommendation on the stock as they anticipate a rebound in the business performance in the second half of the year.

Early last week J.P. Morgan upgraded the stock to "outperform" with a 12-month price target of HK$14.70, noting that it expects pork prices to be supported by a decline in supply after famers cut new hog raising in the first half due to poor profitability, and also because the government has started to stock frozen hogs in an attempt to stop further price declines.

Kim Eng's Ko is also positive about the company's prospects longer term, but says she expects selling pressure in the short-term, both because of last week's unexpected placement and because Yurun's first half results that are due in August or September are likely to be disappointing. Therefore she doesn't recommend investors to buy the stock right now.

"A better entry opportunity, in our view, would be after the 1H09 results announcement," Ko said in a research note Friday. We do not see a share price catalyst in the short term, though we do not rule out there is a possibility of a technical rebound, in case of a deep correction after the new share issue."

In an announcement to the Hong Kong stock exchange on Friday, the company said it intends to use the funds raised to expand its production capacity. It also noted that "in view of the current capital market conditions" it saw the placement as a good opportunity to raise funds and to broaden its shareholder base.

Indeed, investors have been willing to absorb a huge amount of equity over the past couple of weeks in the form of blocks and follow-on placements -- across the Asian markets there have been at least 15 deals raising just over $5 billion -- and the initial public offering Beijing building materials company BBMG this past week attracted the kind of money that brought back a feeling of the bull market in 2007.

However, Yurun came towards the end of all that and, according to bankers, investors are definitely getting a bit tired of the constant placements and requests for their money.

"Investors are fatigued and the next wave of placements will need to come at wider discounts," one banker said, while noting that the number of deals is also likely to decline somewhat in the near term as many companies and investors are coming up towards earnings blackouts that will prevent them from selling shares.