Chaoda raises $229 million from primary placement

Second time lucky for the fruit and vegetable producer, after a false start in April.

Chaoda Modern Agricultural yesterday raised HK$1.78 billion ($229 million) from a placement of new shares. The deal comes less than two months after the company abandoned a similar deal, which resulted in a sharp dip in the share price.
The base deal consisted of 337 million new shares that were offered at a fixed price of HK$4.60 a share, providing a 14% discount to the last trading price of HK$5.35. Due to high levels of demand, the deal was upsized to 388 million shares, which increased the final deal size to $229 million from the original $200 million.

A fixed-price deal was chosen because it provides comfort to investors in volatile markets, said a source close to the deal. With the books open for such a long time -- the deal was launched at lunchtime yesterday (Hong Kong time) and stayed open until late to catch US investors -- a price range could have caused some concern among early investors that their orders might become more expensive as the deal progressed.
This is not the first time that Chaoda has tried to issue new shares in the past few months. In late April, the company suspended trading in its stock signalling that it intended to issue new shares. Two days later, the company issued a statement saying that it had changed its mind. In a call at the end of April, analysts were told by the management that the deal was abandoned due to a combination of recent market deterioration and the potential threats of swine flu.
When the company resumed trading on April 30, the effect on the share price was dramatic with a one-day drop of 18.8% to HK$4.44.
Before Chaoda pulled that placement, some analysts were rather bullish on the company. There is the issue of a $225 million high-yield bond that reaches maturity early next year, but the company had Rmb1 billion ($147 million) in cash to soften the potential blow that this could cause. Managers had also expressed their plans to scale back capital expenditure, which was seen as a positive. Much of this goodwill was lost by the postponed share sale.
At the time, Macquarie analysts issued a research note saying: "Now that the company has signalled that it is less than 100% secure on meeting its high-yield bond due in 2010, the market will expect another share placement at some point and the issue will remain a major overhang on the stock -- likely until either the high-yield bond is bought back or there is a share placement."

April's false start meant that many investors were prepared for the deal this time around. The book was over two times covered by approximately 100 accounts. Half the demand originated from Asia, 30% came from Europe and the rest from the US. The book was described as a mix of long-only and hedge funds. Global and emerging market funds were well represented.

The company's share price has gradually recovered since the sharp dip at the end of April. Last week it was trading at about the same price as just before the suspension for the intended placement in April -- around HK$5.50. However, this is still only about half of its 52-week-high of HK$10.20 in June last year.

Next year's high-yield bond is not the only debt issue that has occupied Chaoda's management. In May, the company paid $182 million to cancel convertible bonds with a principle value of $157 million. This left $10 million of CBs outstanding, which were cancelled for $12 million in June. In February the company raised $51 million in a follow-on sale and some of that money will have been directed towards the CB buy-back.
Chaoda is one of China's largest producers of fruit and vegetables. In 2008 it grew and sold nearly 2 million tonnes of produce. It has 33,000 hectares of production space spread across 34 locations in China.

Merrill Lynch, which was taken over by Bank of America in January this year, was sole bookrunner on last night's deal, with Citi and Nomura acting as co-lead managers. On the aborted placement attempt in April, there were four bookrunners: Deutsche Bank, Merrill Lynch, Morgan Stanley and Nomura.

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