As if to underline that the first quarter this year has been largely about follow-on issues and block trades, two more Hong Kong blocks hit the market last night, raising a combined $220 million. They came with just one day to spare before the Easter holidays and seemingly with no second thoughts about the fact that the trades won’t settle until next Wednesday.
However, in keeping with a practice seen repeatedly since the beginning of the year — and indeed throughout most of last year — the bookrunners had lined up demand for a large portion of each deal before the launch, providing more certainty about the execution.
The biggest of the two transactions saw a unit of US-based Nabors Industries sell a 9.3% stake Hong Kong-listed Honghua Group, a provider of rigs and other drilling equipment for the on- and offshore oil and gas industries. The deal accounted for two-thirds of the vendor’s holdings and raised HK$1.08 billion ($139 million).
The second deal comprised a 5.4% stake in Hong Kong-listed CIMC Enric Holdings that was sold by an entity, which is part-owned by the company’s controlling shareholder. It raised HK$628.2 million ($81 million). CIMC Enric designs and manufactures equipment for the downstream gas industry, including compressors, pressure vessels, and refuelling station trailers. It also makes transportation-related equipment such as containers and trailers, as well as equipment for tankers and airports.
Both deals came after sizeable gains in the share price over the past few months.
According to a preliminary report for the first quarter issued by Dealogic earlier this week, the total equity capital markets volume in Asia-Pacific ex-Japan has reached $47.3 billion in the first three months this year, which is up 8% from the first quarter last year. However, the IPO volume is down 52% and accounts for only $3.4 billion of that total.
It is no different if one excludes Australia. As of last Friday, the total ECM volume is Asia ex-Japan stood at $41 billion, separate data from Dealogic show. Of that, IPOs accounted for just $3.2 billion, or 7.8%, while equity-linked transactions made up 13.5%. Follow-ons, secondary share sell-downs (block trades) and to a lesser extent rights issues, make up the remaining 78.6%.
Honghua Group
Nabors, which is an oil and gas drilling company with operations around the world, has had a strategic relationship with Honghua since before its IPO in March 2008 and at the time of the listing it was its largest customer. It invested in the Chinese company in 2007 and didn’t sell any shares in the IPO. Before this sale it held 450 million shares, which translated into a 13.9% stake.
It sold 300 million of those shares last night, reducing its stake to 4.6%. The shares were offered at a price between HK$3.59 and HK$3.71, which equalled a discount of 4.9% to 7.9% versus yesterday’s close for HK$3.90.
The final price was fixed just above the bottom of the range at HK$3.60 for a 7.7% discount.
According to a source, the deal was fully covered in less than an hour and the bookrunner chose to close the books at 6.45pm, after just over two hours, rather than keep it open for US investors. Despite this, it was said to be well oversubscribed.
More than 55 accounts came into the transaction, comprising a mix of long-only investors, hedge funds and existing shareholders. The deal was supported by reverse inquiries and based on those, there was visible demand for about two-thirds of the deal before the launch, the source said.
Partly thanks to the early close of the books, the majority of the demand came from Asia, which is also where most of its existing shareholders are based.
Honghua’s share price has gained 115% since late November on the back of strong earnings and significant new orders. Indeed, the entire oil and gas equipment industry has rallied in the past four to five months as high oil prices are encouraging new exploration and increased capital expenditures on all forms of drilling equipment.
Honghua said on March 19 that its revenues increased by 45.4% in 2012 to Rmb5.1 billion ($813 million), while its net profit was up 215% to Rmb529.5 million.
Initially a company focusing on land-based rigs, Honghua has been increasing its offshore business and more recently it has also started research into drilling equipment for unconventional energy sources, such as shale gas and tight gas — moves that have attracted a lot of attention from investors.
However, the stock has had a rough few years when it has been trading below HK$1.50 and it has only recently returned above the IPO price of HK$3.83. In fact, the placement price of HK$3.60 is still 6% below the price at which it listed five years ago.
But right now the company is in favour and it isn’t hard to see why Nabors is taking the opportunity to monetise part of its investment, which it holds through an entity called Nabors Drilling International. The source said the business relationship between the two companies will not change as a result of the sale.
Its remaining stake, which at the current market price is valued at about $75 million, is locked up for 90 days.
Morgan Stanley was the sole bookrunner for the transaction. The US bank was also a joint bookrunner for Honghua's $409 million IPO back in 2008 together with Credit Suisse.
CIMC Enric
This deal comprised approximately 75.06 million shares that were sold by a company called CIMC Vehicle Investment Holdings, which is 80% owned by China International Marine Containers (CIMC). It was referred to as a clean-up trade as accounted for CIMC Vehicle’s entire stake, although CIMC, which is part of the Cosco Pacific group, will still own close to 60% of CIMC Enric after this deal.
According to the term sheet, CIMC Vehicle will use the money raised for working capital and as a war chest for potential overseas acquisitions.
The shares accounted for about 17 days of trading and were offered at a price between HK$8.37 and HK$8.63, which translated into a discount of 3% to 6% versus yesterday’s close of HK$8.90.
The stock has gained 156% from its trough in August last year and is up 28.6% so far this year. So, it was perhaps not too surprising that the price was fixed at the bottom of the range for the maximum 6% discount. European markets were also quite weak during the bookbuilding.
This deal was kept open for US investors and that seems to have paid off as about 30% of the deal was allocated to US-based accounts, according to a source. Another 65% went to Asia, while European investors picked up a modest 5%.
About 60% of the demand came from long-only investors, with hedge funds contributing the rest. In all about 25 investors participated in the transaction, which was led by Standard Chartered.
The visibility pre-launch wasn’t quite as great as for Honghua, but of course, the deal was smaller as well. The source said the bookrunner had visibility on about half the transaction when the books opened at about 4.30pm Hong Kong time and was able to go out with a “covered” messaged after about one-and-a-half hours.
