China High Speed and management sell $418 million of stock

The well-received deal is completed at a 6% discount with the company taking just over two-thirds of the proceeds.

Hong Kong-listed China High Speed Transmission and parts of its management last night raised HK$3.25 billion ($418 million) from a share sale that was covered within 30 minutes and attracted strong interest from long-only funds in particular.

The demand indicates that global investors haven’t lost their appetite for alternative energy plays -- China High Speed makes gearboxes for wind power turbines -- which should be encouraging for a number of other Chinese companies in this sector that are currently lining up to go public.

According to a source, the deal was more than three times covered and attracted well over 100 investors. Given that the stock is not that liquid, the placement provided an opportunity for investors to buy into the stock in a meaningful size, and demand was further underpinned by the fact that the shares were offered at a decent discount to the market price. The latter would have come as a bit of a relief to market participants after the previous two Hong Kong block trades had come at very tight discounts – especially in relation to their size.

On Wednesday, Vodafone sold $6.5 billion worth of shares in China Mobile at a 3.4% discount and a week earlier Newbridge raised $1.2 billion from the sale of its entire stake in Ping An Insurance (Group) at a mere 1.2% discount.

By comparison, the discount of 4.6% to 10% offered by China High Speed would have seemed highly attractive, particularly when considering that the deal was significantly smaller than the other two. However, the transaction accounted for about 15% of the existing share capital and 30 days’ worth of trading volumes, so investors may have needed a bit of an incentive to take on the exposure – even if they generally like the stock.

The deal comprised 187 million shares, of which 130 million came in the form of a top-up placement and thus effectively meant they were new shares issued by the company. The remaining 57 million shares were sold by Fortune Apex, a company that collectively holds stock owned by several members of the company management, including the chairman. They were offered at a price between HK$16.65 and HK$17.65 and, after a two-hour bookbuilding, the final price was fixed in the upper half of the range, at HK$17.38, for a 6% discount versus yesterday’s closing price of HK$18.50.

Onshore US investors had a chance to have a quick look at the deal, but given that the order books closed at 8.30pm (Hong Kong time), most of the demand was generated out of Asia and Europe. Among the long-only investors that participated in the transaction were a number of funds that were already shareholders in the company and know it well.

But outsiders focusing on the alternative and sustainable energy sectors had also taken notice of the spike in China High Speed’s share price since its interim earnings and were keen to get in on the action. The stock has risen every day but one since August 27 and has added a total of 12.8%. However, it has had a volatile year and is still trading below the 2010 high of HK$19.58 that it hit in early January.

Net profit rose 121.5% in the first six months of the year versus the same period in 2009 to Rmb563.5 million, on the back of a 71.4% increase in sales of wind gear transmission equipment.

The company told investors that it will use most of the $290 million that it will raise from the sale of new shares (before expenses) to fund capital expenditures within its core gear box business focused on the wind power industry. However, part of it will also be set aside for its new business lines, such as mechanical-electrical integration products and gearboxes for use in the marine and railway industries.

The placement was arranged by Goldman Sachs.

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