Hong Kong-listed China Suntien Green Energy Corp took a tumble after the company said on Sunday that it is planning to sell new H-shares through a private placement. The share price fell 9.8% to HK$2.20, which is the lowest it has been since May this year.
The company, a wind power generator and distributor of natural gas, also announced a decline in net profit for the first six months of this year, which may have contributed to the sell-off. The activity in the stock was high with trading volumes at four times the daily average in the past month.
However, the stock was already on a declining trend and has lost 25.9% of its value since the latest peak on July 24. Until yesterday there had been no obvious reason for the fall.
Suntien said it intends to sell up to approximately 476.7 million new shares, which would account for about 35% of its existing issued H-share capital and represent a significant dilution for existing shareholders. The new shares would account for up to 14.7% of the company’s total share capital when including its domestic shares that are all held by the controlling shareholder, state-owned Hebei Construction & Investment Group.
The money will be used to develop its clean energy business, to replenish working capital and to optimise the capital structure and reduce financing costs, it said.
Suntien did not specify how much money it hopes to raise but, based on the closing price on Friday, the maximum amount of proceeds would be HK$1.16 billion ($150 million). Of course, yesterday’s drop would have reduced that amount somewhat. The new shares may be sold at a discount of up to 20% versus the market price at the time of the sale.
The decision to sell the shares through a private placement is interesting. More and more Chinese companies are choosing this method, which means the shares must be sold to between six and 10 investors. While this does increase the pressure on the bookrunners to find large investors, Chinese companies that have H-shares listed in Hong Kong like it because they do not have to issue any shares to the National Social Security Fund (NSSF).
If they do a normal share placement to a larger group of investors, they have to issue shares corresponding to 10% of the share placement to the NSSF free of charge.
Meanwhile, bankers like the private placements because issuers are often willing to pay a bit more for the certainty of execution and for the banks to find the right investors. Hence, these deals have helped to put some margin back into a business (block trade and placements) that was getting increasingly competitive, resulting in lower fees.
And investors also like them because the aftermarket performance tends to be better with fewer potential sellers after the deal. In other words, they are viewed as a less risky investment even though the size of the commitment for each individual investor is typically larger.
Earlier this year, China Petroleum & Chemical Corp, commonly referred to as Sinopec, and Sinopharm Group, China’s largest distributor of pharmaceutical products, both chose to use private placements as they raised new equity.
Sinopec raised $3.1 billion in February, while Sinopharm followed suit with a $526 million transaction in late March. Sinopharm also was one of the first Hong Kong-listed Chinese companies to do a private placement back in April 2011 when it raised $450 million.
In addition to the placement plan, Suntien also posted its six-month earnings on Sunday and issued a separate statement saying that its auditors, Zhong Lei, had resigned as of Friday last week after its securities practitioner qualification was revoked by the Chinese regulators. The reason, according to Suntien’s statement, was the issuance of an inaccurate audit report by Zhong Lei’s Guanxi branch in connection with an A-share listing.
Zhong Lei has confirmed that there are no other matters in relation to its resignation that need to be brought to the attention of shareholders. Suntien’s board of directors proposes to appoint Reanda as its new auditor, subject to the approval of shareholders.
Meanwhile, Suntien said that its net profit declined by 8.6% to Rmb330 million ($53.5 million) in the six months to June from a year earlier, which it attributed to a significant decrease in revenues related to the global clean development mechanism (CDM), a Kyoto protocol mechanism that aims to promote the development of sustainable energy and reduced emissions. This led to a corresponding decrease in revenue from the company’s wind power projects.
However, the company’s tax payments also increased by 132.4% to Rmb84 million due to the expiration of a tax holiday for natural gas companies and the fact that three of its wind farms have gone from paying no income tax at all to paying half the standard rate this year. Financing costs also increased by 19.6% to Rmb185 million due to increased borrowing by wind farm projects that switched into commercial operation.
Revenues in its natural gas division increased by 15.5%, while the wind power segment generated 29% more revenue than in the first six months of 2012. Wind power accounted for 33.4% of total revenues, which was up slightly from 31% a year earlier. As of the end of June, the company’s consolidated installed capacity of wind farms amounted to 1,346.3 megawatt.
Because the size of the planned share placement exceeds Suntien’s general mandate to issue new shares corresponding to up to 20% of its existing share capital, it will need to seek approval from shareholders. A vote will be held at an extraordinary general meeting on October 8.
The deal is also subject to approvals from the China Securities Regulatory Commission.
According to sources, the company has mandated Citi and Morgan Stanley to work on the private placement. The two banks will also arrange a two-day roadshow today and tomorrow for the Suntien management to meet potential investors after the earnings.
The recent share price decline has again pushed Suntien below its IPO price of HK$2.66 which it moved above only in late May. The company listed in Hong Kong in October 2010 after raising $369 million in a well-received IPO arranged by Macquarie and Morgan Stanley. However, except for the first month and a half, the stock has traded below the IPO price until three months ago.
