Chalco issues Hong Kong's second largest placement this year

Thin discount and mixed outlook on the company doesn't deter demand with book more than three times covered.
Analyst views on the stock may be mixed, but a rallying stock market and underperformance in the companyÆs share price over the past month helped ensure strong demand for a placement by Aluminum Corp of China (Chalco) yesterday.

ChinaÆs largest alumina producer sold HK$4.67 billion ($601.8 million) worth of mainly new H shares after pricing the offer at the top end of the indicated range. This equated to a 3.3% discount to the latest market price. At that size, the sale marks the second largest placement by a Hong Kong-listed company this year after CNOOCÆs follow-on sale a couple of weeks ago.

CICC, CLSA and JPMorgan were joint underwriters for the deal, which even at that narrow a discount û in fact, the tightest for a Hong Kong block trade this year û was said to have been about 3.3 times covered with more than 100 investors taking part.

One Hong Kong broker noted that some of his clients were disappointed they hadnÆt been approached by any of the bookrunners, and said this suggested there was plenty of early demand from the tier one investors to fill the book.

The key question for investors was likely to have been not whether to buy in but rather ôhow much can I have?ö added a sales trader, who said yesterdayÆs near 300 point increase in the Hang Seng Index would have increased the attraction of the offer and the discount, since Chalco was suspended from afternoon trading when most of those gains were accumulated.

The placement comprised 644.1 million H shares, which were offered to investors in a range between HK$7.05 and HK$7.25 before being priced at the top end. The offer range translated into a discount of 3.3-6.0% to yesterdayÆs final price of HK$7.50 - the price at which the stock was trading when it was suspended with five minutes left of the morning session.

The majority of the shares, or 93.2%, were new while the remainder were secondary shares sold on behalf of the National Social Security Fund. The new shares accounted for about 19.5% of the companyÆs outstanding H share capital, which is close to the maximum 20% allowed by Hong Kong regulations in any given year.

The shares also accounted for about 21 days worth of trading, based on the average daily trading volume over the past 12 months, making it a good buying opportunity for investors looking to buy into the stock in size.

According to people familiar with the issue, the deal attracted high-quality investors. Because the deal was launched in the early afternoon Hong Kong time, the placement gave big Asia-based accounts plenty of time to look at the offer which resulted in most of the demand ending up coming from this region. Typically, Hong Kong placement arenÆt launched until the early evening after the market has closed.

According to people familiar with the offer, the company will use the cash raised to expand its alumina production capacity and for acquisitions of aluminium smelters.

Issuing new shares to fund growth is usually seen as a positive, but in this case there could be some concerns - since increased production in China is seen as a potential trigger for downward pressure on global alumina prices. And ChalcoÆs earnings are sensitive to price movements.

The Chinese governmentÆs has been trying to reduce capacity in the aluminium industry - although one observer noted that this was likely to have more impact on smaller producers than on Chalco, which is the dominant producer of the metal. However, the stock did take a bit of a tumble together with other large H shares when China raised interest rates two weeks ago.

In the first quarter, the national production of alumina increased by a stronger than expected 47% year-on-year.

Song Shen, an analyst with Goldman Sachs, sees downward pressure on prices and notes that prices have already softened a bit in the past month.

Shen has a fair-value recommendation on ChalcoÆs Hong Kong-listed stock with a target price of HK$7.10 and doesnÆt seen much upside potential from here.

Analysts at Macquarie Securities are even more pessimistic, having just downgraded the stock to underperform and sliced their target price to HK$6.20 from HK$9.15.

ôWe believe that alumina prices have peaked and that ChalcoÆs shares will perform poorly as alumina prices fall over the next 12-18 months,ö the broker said in a research note, adding that this will more than offset robust aluminium prices and decent sales growth.

On the other hand, analysts at local brokerage firm UOB Kay Hian Hong Kong argue that Chalco's superior technology makes it more efficient and profitable than its smaller competitors, allowing it to ôlead the market and set the pricesö.

Just over one week ago, the company did indeed raise alumina prices for domestic users for the first time this year to reflect the increase in global prices which it said had pushed the price of imported alumina to Rmb6,300 per tonne. Chalco lifted its selling price by 8.7% to Rmb5,650 per tonne.

On the back of that news, the brokerage raised its target price for the stock to HK$10 from HK$9.40.

One observer noted that Chalco is also acting as something of a consolidator within the industry as it is trying to diversify its operations both upstream and downstream to reduce its sensitivity to a fall in alumina prices.

ôThe next few months could be reasonably flat in terms of operations, but ultimately the company is likely to come out of this in good shape,ö a person close to the deal says.

The share price is up 27% so far this year, but has fallen 14% from its peak on April 4.
¬ Haymarket Media Limited. All rights reserved.
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