Placements pick up pace in Hong Kong

Two weeks into the new year and placement activity in Hong Kong is starting to pick up. Last night there were two deals in the market and yesterday morning telecommunication equipment maker ZTE Corp announced that it had sold new H-shares to a small group of investors overnight with the help of Goldman Sachs and Deutsche Bank.

The other two deals were a top-up placement for cement producer TCC International Holdings arranged by BNP Paribas, and a sell-down by the major shareholders in shampoo manufacturer Bawang International Group, which was led by HSBC.

A total of $579 million was raised by the three offerings combined and while that isn't exactly massive, bankers say there is a lot of pitching going on right now for other similar accelerated bookbuild transactions, which suggests the amount of funds needed to be absorbed by the market will soon get a lot bigger.

The timing is good, as investors are sitting on a lot of liquidity and there are not that many Hong Kong initial public offerings to spend it on as many companies seem to be holding off on their listing plans until after Chinese New Year. Until Tuesday the secondary market was also holding quite firm. However, over the past two days it has started to look a bit more wobbly -- on Wednesday the main Hang Seng Index tumbled 2.6%, erasing all the gains made so far this year, after Beijing tightened the reserve requirement for banks, sparking concern that more tightening measures may be on their way. And yesterday, after a pretty strong morning, the index fell 250 points in the afternoon session to again finish slightly lower (down 0.15%) for the day.

However, that in itself may have prompted yesterday's sellers to capture the current share price levels in case there may be more losses to come in the near term.

ZTE Corp

Among the three transactions, ZTE stands out in terms of size. The company raised HK$2.6 billion ($338 million) from a fixed-priced deal that was offered only to a limited group of investors. The reason for that, according to a source familiar with the process, was that in order to speed up the approvals process with the Chinese regulators, which all H-share companies have to go through before they can sell new shares, the company had agreed to restrict the number of investors in the placement to a maximum of 10.

The company offered 20% of its existing share capital or about 58.3 million new shares at a price of HK$45 apiece, which equalled a 13% discount versus Wednesday's closing price of HK$51.70. The discount was wide, but one source noted that this was likely necessary as the deal was chunky, accounting for about 25 days' worth of trading volume.

And given the small number of investors, they would each have had to pick up a fairly sizeable allocation. Assuming there were 10 buyers -- according to some suggestions yesterday there may even have been one or two less -- the average allocation would have been $33.8 million, and it is fair to assume that a few of these would have taken an even larger portion to help anchor the deal.

The stock has had a strong run since the beginning of December and has traded through several analyst target prices. But analysts are still positive about the sector and the stock has good support among the investment community. Also, with only a 15% H-share free-float before this deal, the sale offered a good opportunity for investors to buy the shares in bulk.

Bawang International

The lack of the liquidity was also a key theme for the Bawang placement, which according to a source came about as a result of reverse inquiries from a number of global investors who like the stock, but had difficulty buying it in the market because of a limited number of shares in circulation.

The founding family listened and, having sold no shares in the company's IPO in June, it decided to reduce its stake slightly in order to make more shares available in the market.

They offered 150 million secondary shares with an option to sell another 50 million in case of demand. In fact they could have sold much more than that. At the end of the bookbuilding, the base deal had attracted about 70 investors and was more than 15 times covered, which is almost unheard of for a block trade or a placement, and the deal was obviously upsized in full.

However, the price was set slightly below the top of the price range at HK$5.10, for a 7.3% discount. One source said the bookrunners didn't want to both upsize in full and price at the top, but with that kind of demand, it is difficult to see that five more cents would have made much of a difference. The shares were marketed in a range between HK$5 and HK$5.15, which translated into a discount range of 6.4% to 9% over yesterday's close of HK$5.50.

The deal was anchored by a couple of long-only investors, and otherwise the buyers included both existing shareholders in the stock and new investors. Most of them were long-only funds, including many global names. 

Chen Qiyuan and his wife Wan Yuhua will see their stake in the company fall to 65.4% from 72.3% as a result of this transaction.

The discount on Bawang was likely kept in the single digits by the strong demand from investors, which was well-know before the deal was launched, but at just below 7% of the share capital and about 14 days worth of trading volumes, this deal was also less "intimidating" for investors.

TCC International

Quite the opposite can be said about the TCC trade, which accounted for about 120 days worth of trading volume. The company was also selling the maximum 20% of its existing share capital, and there was quite a bit of noise in the market early in the evening that the deal would be a tough sell.

However, it appears to have gone well enough. By mid-evening the deal was more than twice covered and the bookrunners chose to close the books earlier than initially indicated at 10pm Hong Kong time as the demand was deemed to be sufficient.

The company offered 256.6 million shares at a price between HK$3.26 and HK$3.45, which translated into a discount of 7.5% to 12.6% over yesterday's close of HK$3.73. The final price was set towards the low end at HK$3.30 for a discount of 11.5%.

One source noted that the price was kept low in order to ensure a few key investors stayed in the deal and the double-digit discount was necessary to get new investors to look at the stock. Until now, the shareholder base has been quite thin, but with a number of acquisitions made during the past year the company is attracting more interest. 

Indeed, there was quite good demand from European investors, who were said to have accounted for about 40% of the order amount. Asian investors accounted for about 50% and the remainder of the demand came from the US. In all, about 50 accounts participated in the trade, although a large portion of the deal was said to have been allocated to the top 10 names.

TCC said the proceeds will be used towards the HK$3.8 billion ($490 million) acquisition of clinker and cement production assets from Prosperity Minerals, which was announced on December 18.