China Resources Power shareholder exits near the record highs

CRP placement seen as well received amid positive sentiment for the sector, but Kerry Properties drops below placement price after parent sells stock at an aggressive discount.
Riding on a wave of positive sentiment surrounding the Mainland power producers, an institutional shareholder has sold HK$904 million ($116 million) worth of shares in China Resources Power.

The sale, which took place late Thursday (October 5), represented about 3% of the outstanding capital and the entire stake held by the undisclosed shareholder. CLSA acted as sole bookrunner.

The offer initially comprised 50 million shares plus a greenshoe of 25 million shares, but in the wake of a very strong response in the market the seller decided to dispose of the rest of his shares as well. This increased the total offer to 113 million shares.

The price was fixed at HK$8, in the middle of the HK$7.80 to HK$8.20 price range, for a 5.9% discount to ThursdayÆs closing price.

The sale came after the share price finished at a record high of HK$8.52 on Wednesday and on the back of a 73% gain in the past 12 months. The stock has more than tripled from its IPO price in November 2003 when it sold afor HK$2.80, although it was unclear whether the selling shareholder had owned the stock since then

Before the placement on Thursday, however, the share price edged down 0.23% to HK$8.50. The drop continued on Friday in the wake of the share sale, but after hitting a low of HK$7.95 the stock rebounded above the placement price and finished down just 3.1% at HK$8.24. The companyÆs power producing peers were also down on profit-taking.

That CRP held up so well was likely a reflection of the small size of the sale and the fact that it was an independent institutional shareholder who decided to cash in.

By comparison, Kerry Properties, which saw its controlling shareholder û the Kerry Group û sell $180 million worth of shares at an aggressive 2.8% discount to WednesdayÆs closing price earlier on Thursday, dropped 3.1% when it resumed trading on Friday after a dayÆs suspension. It tumbled 5.1% versus the price reached in pre-market auction trading on Thursday before the suspension.

The China Resources Power block was about four times covered with a mixture of new and existing shareholders in the book, according to a source familiar with the sale. About 60% were placed with investors in Asia, 30% went to the US and the remaining 10% to Europe. In terms of the type of investors, long-only funds took up about three quarters of the deal while the rest went to hedge funds.

The interest was believed to have been sector-linked to a large extent, as talk of another upward revision in tariffs has sent the Mainland power companies higher in the past month. Even with FridayÆs correction, sector leader, Huaneng Power International, has added 13.2%, Datang International Power Generation is up 17.8%, China International Power has gained 21% and CRP itself is up 15.2%.

Since China implemented a fuel cost pass-through mechanism in June 2005 to enable the power producers to adjust tariffs to reflect the rising price of coal, on-grid tariffs have been increased three times, including most recently in July when they went up by an average 3.6%.

According to Fitch Ratings, the previous two adjustments together with higher energy sales resulted in a rebound in operating EBITDAR margins for the power producers in the first half of this year, reversing the margin compression seen over the past three years.

China Resources Power is also one of the top power picks by a number of analysts. Morgan Stanley for one, has CRP as its only overweight stock in the sector which it attributes partly to the companyÆs exceptional cost control, an EBIT margin of 27.9% in the first half (compared with HuanengÆs 16.9%) and its rapid capacity expansion.

The company is pursuing further greenfield opportunities in several provinces such as Henan, Hebei, Guangdong and Shanxi, Morgan Stanley said in a research note following the first half earnings.

Of the 20 analysts following the company according to Bloomberg data, 13 have a buy recommendation. The remaining seven advise clients to hold.

ôHuaneng Power has reached a technical resistance level at HK$6 that it is struggling to get through and this is expected to be the trigger for some of the other stocks to catch up,ö says one observer.

Meanwhile, Kerry Group offered 50 million shares in its property development and investment subsidiary at a price between HK$28.10 and HK$28.60, which represented a discount of only 1% to 2.8% to the previous dayÆs close. Not surprisingly the price was fixed at HK$28.10 for the maximum discount.

Even at that price, however, the discount was the tightest for a placement (of size) by a Hong Kong listed company since an existing shareholder sold $167 million worth of shares in China Construction Bank 0.76% below market price on April 27. That sale, which was arranged by Deutsche Bank and UBS, accounted for only 0.18% of the outstanding capital and 1.2% of the freefloat.

The 14 placements of primary or secondary shares by Hong Kong listed companies that have been completed since then have fetched an average discount of 5.07%. No sale have been done at a discount below 3.3%. (The calculation excludes Huabao PowerÆs share sale which was priced at a 21.4% discount as the stock was in the process of re-rating following a reverse takeover that resulted in it moving into a completely different business.)

According to a statement issued by Kerry Properties on Friday, Kerry Group sold the shares to Citigroup for HK$28 apiece. Citigroup, which acted as the sole placing agent, then offered them on to the market at the slightly higher price in a sale that was said to have been less than two times covered.

The sale saw the Kerry Group trim its stake in Kerry Properties to 57.3% from about 61.4%.
¬ Haymarket Media Limited. All rights reserved.