Larry Yung, the former chairman of Hong Kong-listed Citic Pacific, has joined the growing list of substantial shareholders who are taking advantage of the continuing uptrend in the Hong Kong equity market to release some cash from their portfolios. Last night Yung raised HK$732 million ($94.5 million) from the sale of about 60 million shares in the Hong Kong-listed Chinese conglomerate, which is currently the subject of a police investigation following a series of foreign exchange bets gone wrong that resulted in close to $2 billion of losses for the company.
Yung resigned from Citic Pacific in April, shortly after Hong Kong police raided the company's offices as part of the ongoing investigation and after the company had been forced to seek a government bailout to cover the FX losses. It is not too surprising, therefore, that he is seeking to trim his equity holdings in his former employer. The sale, which accounted for 1.6% of Citic Pacific's outstanding share capital and about three days worth of trading volume, will see Yung's stake fall to 9.9% from 11.5%.
The shares were offered to investors at a price between HK$11.95 and HK$12.20, which represented a discount of 7.6% to 9.5% versus yesterday's close of HK$13.20. After a swift bookbuilding that lasted only an hour but attracted a large amount of interest, the price was fixed at the top of the range for a 7.6% discount. Morgan Stanley acted as sole bookrunner.
Given how volatile the markets were yesterday, one source says many investors preferred to look at the day in terms of volume-weighted average prices, and on that basis, the Citic Pacific block was priced at a slightly more modest discount of 5.9%. The company's share price spent most of the day trading within easy reach of the previous session's close of HK$12.76 (above and below), but with 40 minutes left of trading, it suddenly spiked higher and eventually finished the day 3.45% higher.
The share price has risen 260% since October 20 when the revelation of the FX losses triggered a 75% collapse to just HK$3.66 and is now almost back to where it was before that announcement. However, it is still far away from its highs above HK$50 in October 2007.
And perhaps that is why investors are still -- despite the ongoing investigation and the management changes -- keen to buy the stock. The company also remains part of the blue-chip Hang Seng Index. According to the source, the deal was more than five times covered and attracted about 70 investors, even though some investors were turned away after the book closed. As is typically the case on placements that are only open for a short while after the close of the local market, the demand was predominantly Asian. Encouragingly, the buyers included a lot of mutual funds, which suggests that fundamental investors are becoming more confident. Until now, the smaller placements have to a large extent been targeted by short-term investors seeking to boost their performance by taking advantage of the discounts to realise a little bit of profit each time.
The buyers of the Citic Pacific deal also included hedge funds and private wealth accounts.
The attraction of Citic Pacific, which is controlled by state-owned investment company Citic Group, lies in the fact that its operations are pretty diversified, which is helpful in an economic downturn. The company has changed its core focus several times during the past 10 years, but at present its key business lines include special steel manufacturing, iron ore mining, property development, power generation, infrastructure, telecommunications, auto distribution, consumer products and aviation through its 17.5% stake in Cathay Pacific Airways.
At the time of his resignation, Yung had been with Citic Pacific for more than 20 years. In his resignation letter he noted that the search warrant executed by the Commercial Crime Bureau on April 3 had had a great impact on society. "Faced with this reality, I think that my resignation would be in the best interests of the company," he added.
He was joined out the door by managing director Henry Fan, who noted that he felt it was "appropriate" to leave at the same time as Yung. At the end of last year, finance director Leslie Chang also left the company as a direct result of the FX losses, which stemmed from contracts entered into to hedge an exposure to the Australian dollar.
In November, Citic Pacific struck an agreement to sell the majority of its "toxic" contracts to Citic Group, effectively eliminating any further losses from this exposure. In return, Citic Group got an increased equity stake through a $1.5 billion convertible bond that will be automatically converted. As a result of the bailout, Citic Group's direct ownership in the company increased to 57.6%.