Morgan Stanley sells China Dongxiang stake

The private equity arm of Morgan Stanley yesterday sold its remaining 3.6% stake in sports apparel designer and retailer China Dongxiang Group, raising HK$568 million ($72.8 million). The placement was launched just after the end of Hong Kong trading and the books closed within an hour.

The deal consisted of 203 million shares, which were offered at a price between HK$2.70 and HK$2.80, or a discount of 4.8% to 8.2% versus yesterday's close of HK$2.94. The deal was priced at the top, for the tightest discount of 4.8%.

Around 80 investors participated in the deal, which reached a coverage ratio "in the high single digits", according to a source. Due to the timing of the deal - US markets were still shut - the buyers were mostly European and Asian. They consisted of a mix of long-only investors, hedge funds and private wealth managers.

This is not the first time that Morgan Stanley has divested part of its pre-IPO investment in China Dongxiang. Last May, the bank sold 355 million shares for $164 million. This deal priced at HK$3.60, much higher than yesterday's price, but still at a 9.5% discount to the company's IPO price of HK$3.98. Morgan Stanley organised both sell-downs.

Shares in China Dongxiang gained 3.16% yesterday, and despite some turbulence last week when the company reported its 2008 earnings, the stock has generally been on the up - adding 10% in March alone.

China Dongxiang designs, markets, and sells branded sportswear. One of its main selling points is that it owns the exclusive rights to the Kappa brand in China.

Last week, the company reported net profits after tax of Rmb1.3 billion ($200 million) for 2008, a year-on-year increase of 86%. With 2009 presenting a much more difficult environment, such strong results are unlikely to be repeated, say analysts. Macquarie for example, expects earnings growth to shrink to 20% this year.

A Macquarie research note also predicts sales growth to slow to 25% in 2009 on the basis of two factors: deteriorating growth in orders and the poor contribution of its Japan Phenix subsidiary, diluting the company's overall sales growth.