Yurun and its chairman raise $511 million through placement

Hong Kong-listed China Yurun Food Group was in the market last night with a placement of new and existing shares that raised a combined HK$3.96 billion ($511 million). The deal coincided with the share price closing at a new record high, but was still quite well received.

The existing shares, which accounted for approximately 46% of the deal, were sold by a company owned by chairman Zhu Yicai and his wife. This was the third time in four years that the chairman reduced his stake in the Chinese pork meat processor and supplier and market watchers say investors are becoming quite familiar with the exercise and don't necessarily see it as a negative -- even though it involves an insider selling, and this time at a high price too.

"Over time investors are getting used to these sell-downs and are treating them as liquidity events," one source said, noting that the practice isn't too dissimilar to the repeated sell-downs by former Esprit chairman Michael Ying, which tend to be well received.

A key difference versus Ying's divestments, however, is that so far Zhu has paired each of his sell-downs with the sale of new shares by the company. While on the one hand this means that there will be some dilution for existing shareholders, it also means that the company gets fresh funds to use towards the growth of its business.

Last night's sale comprised a total of 166 million shares, of which 90 million were new and 76 million secondary. They were offered in a range between HK$23.88 and HK$24.94, which translated into a 5% to 9% discount versus yesterday's close of HK$26.25. After a bookbuild that lasted about four hours, the price was fixed at the bottom of the range for the maximum 9% discount.

The fact that the price came at the bottom was not a huge surprise, given the strong run-up in the share price -- it gained 4.2% yesterday alone -- and the chunky size of the deal. It was the second largest placement by a Hong Kong-listed company this year after Ying's latest sell-down in Esprit in early February, which fetched $600 million and was priced at a 6% discount. The Yurun transaction also accounted for 10% of the market cap and about 25 days' worth of trading volume. Importantly, it was also a highly contested deal with four to five banks fighting for the mandate. In situations like that, the involved banks often push the low end of the price range as low as they can before the deal is even launched and it is rare to see the deal price above the bottom of the range.

In this case, the mandate was given to Morgan Stanley and UBS, which also arranged the previous Yurun follow-on and sell-down in July last year.

The chairman's stake will fall to just below 30% from about 36% before the transaction and both he and the company have committed not to sell any more shares over the next six months.

According to a source, the deal attracted close to 70 investors and saw good demand from long-only funds. The deal was kept open until 11pm Hong Kong time, which gave US investors plenty of time to have a look at the transaction, and Asia, Europe and the US were all well represented in terms of orders.

The share price performance would have been one reason for the investor interest, with the stock up 84% since the previous placement in July, which raised $341 million. But the well-researched company has also been on a non-deal roadshow following its 2009 earnings release at the end of last month, giving investors a chance to catch up with the management and its latest plans for the company.

The fact that the deal was above $500 million likely also played a role. Recently, investors have appeared to prefer to increase their exposure to Asia through capital markets transactions where they can buy in size, rather than through in-the-market purchases that risk pushing up the share price before they have managed to acquire their desired amount. And the larger the deal, the easier for them to get their orders filled.

Yurun reported a 53.4% increase in net profit in 2009 to HK$1.75 billion, despite a more than 20% decline in hog prices during the year. In a statement at the time, the company said it had been able to significantly increase sales volume by leveraging on its strong "Yurun" brand, pricing power and nationwide production network. At the same time, it was able to further realise economies of scale by enlarging its market share, thus achieving further improvement in gross margins of both its upstream and downstream businesses.

According to its own estimates, Yurun, as the leading meat processor and meat products supplier in China, stands to benefit from new guidelines for the Chinese hog slaughtering industry issued at the end of 2009, which aims to accelerate industry consolidation and systematically increase the sales percentage of chilled meat and small packaged pork products in China. The intention is to close 30% of the outdated manual and semi-automated slaughtering plants by 2013 and 50% by 2015, which are deemed to be below hygienic standards.