Chinese starch producer brings first convertible in a month

China Sun Bio-chem's deal was bought mainly for its equity story, but may signal the start of a new wave of CB issuance after the slow summer period.
Singapore-listed China Sun Bio-chem Technology Group yesterday (September 6) raised $100 million from a sale of convertible bonds that bankers say could signal the beginning of a new wave of CB issuance following the market correction in May and the subsequent summer lull.

The JPMorgan-led sale, which was wrapped up in about two hours, was the first equity-linked deal to hit the Asian market since MalaysiaÆs Berjaya Land issued a $246 million ringgit-denominated bond exchangeable into lottery operator Berjaya Sports on August 7. And it was the first dollar-denominated CB since VideoconÆs ill-fated $105 million offering in mid-July.

With no credit bid provided by the bookrunner, China SunÆs offer was largely bought for the equity story, which includes a healthy earnings outlook spiced up by a plan to move into the production of alternative fuels. However, the Chinese company, which makes corn starch and other corn-based products such as germ, fiber and gluten, has yet to receive a license to produce fuel ethanol and at this point the market is regarding that plan only as ôa sweetener,ö one observer says.

æThe main investment thesis is: it is China, itÆs a consumer play, itÆs starch and various by-products û whether they do fuel ethanol or not. And in the medium term this company is well placed to capitalise on biofuel products,ö he adds.

This makes China Sun a very similar investment proposition to Celestial NutriFoods, which is leading producer of soy protein-based food and beverage products - and which plans to start manufacturing biodiesel. Celestial NutriFoods sold $150 million worth of Singapore dollar-denominated CBs in mid-May, also through JPMorgan.

One analyst ranks the companyÆs chances at securing a fuel ethanol license at only slightly better than 50-50 given that there is one other applicant in Liaoning province where China SunÆs main production facility is located.

The zero-coupon bonds, which were issued at par, have a five-year maturity but can be put back to the issuer after three years for a yield of 6.90%. If not converted, they can be redeemed at maturity at 140.38% of face value for the same return. The bonds were marketed to investors in a yield range between 6.75% and 7.125%.

They were offered at a fixed conversion premium of 30% over TuesdayÆs (September 5) close of S$0.825, which gives a conversion price of S$1.0725. The share price has doubled from S$0.405 a year ago, but is off from its April 19 high of S$1.02.

There is an issuer call after three years, subject to a 130% hurdle.

The issue was priced with a bond floor of 94.4%, which was described by one observer as ôreasonableö given that there is no asset swap or CDS and no stock lending. The CB is also quite chunky, accounting for almost 25% of the $420 million market capitalisation.

The deal has an implied volatility of just over 27%, compared with an historic volatility of more than 60%. The pricing assumes a credit spread of 350 basis points over US Libor, on a three-year basis, a dividend yield of 1.2% and a stock borrowing cost of 5%.

The book was said to have been multiple times covered with about 20 investors participating and according to a market source the bonds were bid at about 100.75 in the grey market at the end of the Asian trading day yesterday. The sale was launched in the early morning and completed by lunch time.

About 80% of the demand came from Asian-based accounts, although a lot of that money likely originated out of the US given the strong interest in alternative fuels among US funds, the source says. A majority of the bonds was said to have been placed with hedge funds.

In a research note issued a couple of months ago, Merrill Lynch projected that demand for corn starch and modified starch will grow by 15% and 10%, respectively, going forward, which will help boost earnings growth at China Sun. The investment bank initiated coverage of the stock with a ôbuyö recommendation and set a 12-month target price of S$1.26.

Gregory Yap at Kim Eng notes that the continued rise in corn prices û up 14% year-on-year in the first half û could erode the companyÆs profitability, but says the six month results show the company is on track for 22% earnings growth for the full year. Raw material prices are rising primarily because of increasing demand from downstream processors like the company itself.

The proceeds from the CB will be used for working capital, business expansion and potential acquisitions, although no specific targets have been identified.

Other CBs in the pipeline include an offering from Hynix Semiconductor, which bankers say could come over the next few days after being loosely tested in the market for some time. That deal, which is expected to be around $400 million, is a kind of follow-on to the $1.5 billion equity offering in June and will be arranged by the same banks that brought that deal to market, ie Credit Suisse, Deutsche Bank and Merrill Lynch.

Bankers are also pitching aggressively in India to revive the CB market there, which has seen only one equity-linked deal of size since the stockmarket correction in May. Southeast Asia is also expected to turn out a few more CBs in the next month, while further north the RFPs for a Korea Electric Power Corp (Kepco) CB are due early next week. This deal could be around $800 million in size, according to market talk.
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