The deal was completed at a 15% discount to yesterdayÆs close of HK$20.40. That big a discount is unusual for a Hong Kong placement, but observers say the seller may have felt that it was necessary given that ChalcoÆs share price almost doubled during the final two weeks of August. At the final size, this is also the largest block trade in Asia since CNOOC sold $1.98 billion worth of new shares in April 2006. It accounts for 22.4% of ChalcoÆs H-shares and 30.4% of the free-float.
The Chalco stock has become highly volatile as investors have bid it up primarily on the basis that it could become one of the key beneficiaries if Chinese individuals are allowed to invest in Hong Kong. On top of that, sole bookrunner Goldman Sachs had only five hours to complete the placement before ChalcoÆs American depositary receipts (ADR) were to start trading in New York.
ôThe deal was priced to go,ö one broker says.
ôYou never get a 15% discount on a quality company like this,ö adds a banker, noting that the arbitrage opportunities alone would have made it an attractive buy.
The initial offering comprised 700 million of ChalcoÆs H-shares with an option to increase up to 884.2 million shares û or AlcoaÆs entire holding in the company. The upsize option was exercised without a problem as the total offering (including the additional shares) was just under four times covered, according to a source close to the deal.
Not surprisingly though, given the current market jitters and the rapid climb in the share price, there was still quite a lot of price sensitivity in the book and the price was fixed towards the bottom of the HK$17.26 to HK$18.27 range at HK$17.34.
However, Chalco hasnÆt traded above HK$17 for more than two-and-a-half weeks and on August 16 it closed at a two-month low of HK$11.98, meaning it has risen 70% in just three-and-a-half weeks. The stock closed at a record high of HK$22.60 on August 28 after hitting HK$26.35 earlier that day.
ChalcoÆs US-listed ADRs took a hit yesterday in the wake of the placement, falling 9.3% to $60.01. However, the fact that the drop was smaller than the placement discount suggests the market wasnÆt alarmed by the generous pricing.
It is also worth noting that of the three Hong Kong placements that have taken place since the market started recovering in mid-August, two have been done at the bottom of the offered ranges at a 7.5% and 11.4% discount respectively. Both were significantly smaller than the Chalco deal at $171 million and $166 million.
The third, which was a small secondary placement of only $80 million in Lee & Man Paper, was completed towards the middle of the range at a 5% discount on the second attempt last Friday. On the first try earlier in the week, that deal too was to have priced at the bottom of the price range for an 8.5% discount, but the seller wasnÆt happy with that and decided to pull the deal.
ChalcoÆs indicated range translated into a discount of 10.4% to 15.4% versus yesterdayÆs closing price.
Even with the deep discount, Alcoa has by no means done a bad deal. The US-based aluminium producer bought into ChalcoÆs initial public offering in 2001 to help facilitate its listing. Based on the IPO price of HK$1.37, Alcoa will have made a profit of about $1.8 billion on its original investment before expenses.
The two companies also entered into a strategic cooperation at the same time, although analysts say it isnÆt that clear how much cooperation there has actually been since then. One source said last night that the sale of AlcoaÆs holdings in Chalco will not change the strategic relationship between the two companies.
More than 100 investors were said to have participated, comprising a ôgood mixö of long-only investors and hedge funds. The source noted that there had been strong momentum in the bookbuilding thanks to good interest from several Hong Kong tycoons. Some existing investors took the chance to top up their holdings and the final line-up also included a few US names, even though the book closed already at 8.15pm Hong Kong time.
The optimism stems from the fact that despite the recent share price gains, ChalcoÆs Shanghai-listed A-shares are still trading at a massive premium to the H-shares û a gap which is expected to narrow when the pilot scheme allowing individual Chinese investors to buy Hong Kong shares is given the final go ahead. Based on yesterdayÆs closing price and an exchange rate of Rmb1 to HK$1.04, the A-share commands a 134% premium over the H-shares.
The recent gains have also been supported by better than expected first-half earnings and news that the company is looking to make more acquisitions. ChalcoÆs net profit dropped 5% to Rmb6.4 billion ($843 million) in the first half of 2007 due to lower aluminium prices, but still exceeded analysts forecasts. Earnings are likely to come under renewed pressure in the second half, however, as product prices are expected to trend lower.
Even so, Goldman Sachs earlier this week upgraded its earnings forecast for Chalco and raised its target price to HK$28, which is well above the analyst consensus at HK$14.50, according to Bloomberg data. Last week, Deutsche Bank lifted its target price by 23% to HK$15.