Alongside the busy initial public offering calendar in Hong Kong, companies that are already listed and existing investors continue to take advantage of the current high share prices to replenish their coffers or -- in the case of the investors -- capture some of the profits they have racked up in recent months. The fact that the Hong Kong market took a breather yesterday with a 2.5% drop is only going to reinforce that trend as the fear of a market turnaround is likely to prompt anyone pondering an equity sale to act now, bankers say.
Among the latest such offers are a top-up placement in China Everbright International (CEI) and a sell-down by Morgan Stanley Private Equity and CDH China Fund in China Shanshui Cement, which were both in the market on Wednesday night following impressive share price gains in recent months. The two deals raised a combined $358 million and while they both priced at the bottom of the indicated price ranges, the discounts were tight. This was especially true for CEI.
China Everbright International
A company focused on the management and construction of various environmental protection projects, such as waste water treatment and waste-to-energy power projects, CEI isn't a very liquid stock and the placement accounted for no fewer than 67 days' of trading based on the average daily volume over the past three months, and 36% of the free-float.
Having been offered at a discount between 4.1% and 5.3% versus the latest market price, it was therefore no real surprise that the deal was priced at the very bottom of the HK$3.03 to HK$3.07 range for the maximum 5.3% discount and a total deal size of HK$1.45 billion ($188 million). More surprising perhaps, was the fact that the aggressively priced deal was well oversubscribed and attracted more than 50 investors.
A source familiar with the offering noted that the investors who participated weren't that hung up on the discount, but rather saw this as a rare opportunity to build a meaningful position in the stock. Among the attractions, source say, is the company's good position in the market -- not least thanks to its ties to the China Everbright Group, which held about 56% of the company before this deal. Three weeks ago, CEI also secured a $200 million 10-year loan from the Asian Development Bank, which analysts say will allow it to speed up its development of waste-to-energy projects. The company also intends to move into other alternative areas like wind, solar and bio-mass power and is expected to launch its first solar or wind project in the short term.
Sole bookrunner Nomura is said to have secured the demand before launch from a couple of Asia-based long-only funds who acted as anchors of the deal, but there was also good follow-up from some European specialist green funds who came into the deal in the early evening Hong Kong time and kept up the momentum in the book. About half of the shares were allocated to Asian investors, 40% to European investors and 10% was sold to US investors. Hedge funds got scaled back in order to prioritise the long-only demand.
CEI initially offered 450 million shares, or 13.6% of the company, through a top-up placement, which means the parent company first sold existing shares to the market and then subscribed to the same number of newly issued shares at the same price to ensure all the proceeds would end up with the company. To help make allocations less tight, Nomura also exercised part of a 100 million-share upsize option, bringing an additional 30 million shares into the offering. This increased the deal size slightly to $188 million from $175 million.
The deal was launched mid-afternoon on Wednesday after the stock was suspended and the books were kept open until about 10pm Hong Kong time. The share price held above the placement price when the stock resumed trading yesterday and volumes were very thin, suggesting few people were interested in selling. Then by 3pm there was a huge squeeze in the share price as some investors who had been short of the stock started to cover their positions, pushing the price as high as HK$3.46 - an 8.1% gain on the day. Just before the close it corrected again, ending the day 1.9% higher at a new 12-month high of HK$3.26.
China Shanshui Cement
Meanwhile, the private equity arm of Morgan Stanley and CDH, which both invested in Shanshui Cement before its IPO in July last year, raised a combined HK$1.32 billion ($170 million) in a placement that was completed in just two hours after the close of the Hong Kong market on Wednesday. The price was fixed at HK$5.50 for a discount of 2.7% versus Wednesday's close of HK$5.65. The shares were offered in a range between HK$5.50 and HK$5.59, which translated into a discount of 1.1% to 2.7%.
This was the third time in five months that Morgan Stanley was selling Shanshui Cement shares and the second time it was joined by CDH. The two pre-IPO investors also sold $129 million worth of shares in April and in mid-July Morgan Stanley divested an additional $80 million of stock. The sales have done nothing to dampen the enthusiasm among other investors for the stock, however, and each sale has been done at a higher price than the previous one. As of Wednesday -- when the stock closed at a new record high -- Shanshui Cement's share price had doubled from the IPO price of HK$2.80.
The two sellers offered 240 million shares, of which 180 million came from Morgan Stanley and 80 million from CDH. Morgan Stanley Private Equity will still own about 8.8% of Shanshui Cement after this deal, while CDH's stake will drop below 1%.
About 40 investors participated, with a bias for high-quality mutual funds and other long-only investors. Most of the demand came from Asia, but there were some orders from Europe and the US as well, according to sources.
There has been a lot of focus on the China cement sector over the past couple of months, not just because government-driven spending on infrastructure is boosting demand, but because of the attention brought on by a couple of new listings. BBMG, the largest supplier of cement and other building materials in Beijing, listed in July after a $768 million IPO that was one of the most sought after in Hong Kong ever. And over the past week, the largest cement producer in Southern China, China Resources Cement, has been in the market attempting to raise up to $825 million. The company is scheduled to announce the final price today.
Sell-downs by pre-IPO investors have the added benefit of increasing the free-float, which helps improve the daily liquidity in the stock and makes it easier for investors to get out quickly should they need to. And that typically makes funds more comfortable to invest. This latest sale accounted for about 8.6% of the company and will increase the free-float to about 51%.
The share price dropped 2.65% to HK$5.50 yesterday in the wake of the deal, which was in line with the fall in the overall market.
Credit Suisse and Morgan Stanley were joint bookrunners for the deal. These two banks also arranged last year's IPO.