Baring exits Hidili four weeks after IPO

The sale by Baring Private Equity of its remaining 220 million shares in coking coal producer Hidili Industry International Development on Monday achieved one of the lowest placement discounts by a Hong Kong-listed company over the past month, but that is not primarily why it has attracted so much attention.

What market participants were talking about yesterday was the fact that the firm was able to sell in the first place - less than one month after HidiliÆs trading debut on September 21 û given that it had agreed to a six-month lock-up.

The mechanics is easy enough to understand: The lock-up is a commitment by a substantial shareholder or a cornerstone investor to the banks arranging the deal not to sell any shares for a certain period after the IPO. If the banks agree to relieve the shareholder of this commitment before the set time, the shareholder is free to sell. And that is exactly what happened here. UBS, as the sole bookrunner of the IPO, agreed to waive BaringÆs commitment not to sell for six months and Baring sold, raising total proceeds of HK$3.15 billion ($404 million). UBS also arranged the placement.

But while there was nothing technically wrong here, the transaction has raised the issue of what function the lock-up actually has and whether the credibility of future lock-ups may be undermined by waiving the commitment after only one month. On the one hand, one can argue that the share price stability that the lock-up is meant to provide after the IPO is no longer an issue here as Hidili has soared 120% since the debut. On the other hand, nobody can know for sure what the market has in store for the next few months and this increase of the free-float could make the stock more vulnerable in case of a rapid downturn. And while the market has risen a lot since Hidili came to market it is still extremely volatile with large intraday swings.

ôA waiver this soon after the IPO goes against the spirit of the lock-up and I donÆt see how this does any service to the other IPO investors,ö says one observer.

Baring, which was a pre-IPO investor in Hidili and sold about half its holdings during the IPO, still held about 11% of the company. This made it the second largest shareholder after the companyÆs 33-year-old founding chairman and CEO Xian Yang who owns 59%.

It isnÆt yet clear how HidiliÆs other investors feel about the sale, as the stock remained suspended from trading yesterday, but the company itself was clearly not happy. In a statement issued last night, the board of directors said it ôregrets to announce that it has been informed by the vendor (Baring) that a placing agreement has been entered into between the vendor and the placing agent (UBS) pursuant to which the placing agent has agreed to place the 220 million shares to certain investors.ö While muddled with legal speech there is no mistaking that Hidili's board is disappointed that Baring has decided to exit the company so soon after the listing.

One market participant said he was okay with the sale, however, as he felt confident that UBS wouldnÆt have agreed to this had it not felt the current share price was sustainable.

ôI agree that one month is a bit extreme, but everybody understood that Baring was a financial investor and not there for the long term. It does put some pressure on the bank to finds a good home for these shares, though,ö he says, adding that there were some suggestions that part of the deal may been a negotiated transaction between Baring and one other party who wanted to buy a sizeable stake.

Even so, the sale also raises the question of what the other investors who are locked-up will make of this. HidiliÆs IPO was supported by four cornerstone investors who bought a combined $80 million worth of shares, which gave them 15.2% of the total deal or 4.6% of the company pre-greenshoe. Supposedly these four - Hong Kong property tycoons Lee Shau Kee and Joseph Lau, Bank of East Asia chairman David Li and the Malaysian Kuok family which controls the Kerry Group, Shangri-La Asia and the South China Morning Post - would also like to secure at least part of their 120% profit if they could. And speculation that they too may be allowed to sell could easily translate into an overhang on the stock.

To be fair, there is a difference between cornerstones and pre-IPO investors as the former agree to the lock-up partly as a way of getting a certain allocation in the IPO that is typically larger than what they would have achieved had the subscribed through the usual channels. As a pre-IPO investor Baring has already had its money tied up in the company for some time.

According to market sources, the private equity firm wanted to sell as it is setting up a new fund and wished to be able to show a good track record with regard to its previous investment exits. Baring declined to comment on any aspects of the sale.

Whether warranted or not, the fact is that quite a few of the recent Hong Kong IPOs have recorded substantial gains in their first few weeks of trading which means the same argument of a lock-up waiver having no impact because the share price is already up a lot could be made to make such actions more frequent. And if that was to happen the entire lock-up mechanism could become watered down and lose its meaning as a sign of confidence in the companyÆs future growth prospects.

However, the investors who took part in the placement on Monday appeared to have no such concerns as sources said the deal was about seven times covered with more than 80 investors submitting orders. A large portion of the deal was said to have gone to one single investor who didn't previously own stock in the company, which to some extent would have eased the psychological effects of BaringÆs exit from the company.

The 220 million shares were offered in a range between HK$13.58 and HK$14.32, which represented a 5% to 10% discount versus MondayÆs closing price of HK$15.08. It was priced at the top end of the range for a 5% discount û the third lowest among the 12 placements that have been completed in Hong Kong in the past four weeks. The price translates into a 110% premium to the HK$6.83 that investors paid in the $525 million IPO in mid-September.

Including the greenshoe, Hidili raised $603 million from the IPO, which attracted more than 400 institutional investors and was priced at the top of the offering range. It is the
first Hong Kong-listed coal producer to focus solely on coking coal, which because of its higher heat content, makes it ideal for the iron and steel industries. China Coal, Shenhua Energy and Yanzhou Coal primarily produce thermal coal that is used by power generators.

The company has 14 operational mines in the Sichuan province and acquired five new mines in the Guizhou province in the first quarter this year that will begin production in the second half.