Conch Venture ignites investors with debut CB

Hong Kong-listed environmental company raises $500 million from its debut convertible debt issue and offered investors an alternative against the bulk of outstanding papers from the property sector.

China Conch Venture, an environmental solutions provider and a major shareholder in the country’s largest cement producer, extended the streak of equity-linked issuance in Asia ex-Japan this year as it raised HK$3.925 billion ($500 million) from a five-year convertible bond sale on Wednesday.

The Hong Kong-listed company’s latest bond sale took total equity-linked issuance in Asia ex-Japan to $11 billion so far this year. With four months remaining towards the end of the year, there is little doubt the figure could surpass $11.2 billion of 2011, or even edge close to 2010’s $15.5 billion, the highest volume over the past decade.

China Conch Venture, which engages in environmental-related businesses including industrial solid waste treatment and energy saving, offered something different to equity-linked specialists after the market was flooded with new issues from the property market at the beginning of the year.

Naturally, the company is also the only Hong Kong-listed convertible bond issuer with net cash at the time of issuance so far this year, standing out from a large group of Chinese property developers issuing convertible bonds to potentially deleverage their balance sheet.

China Conch Venture said it would use the proceeds to fund future project development and for general corporate purposes – sending a good signal to the market its business will continue to grow.

The company issued the convertible bond just three days after it reported a solid first-half performance. Its net profit grew 75.5% to Rmb2.5 billion ($366 million) year-on-year while operating profit margin improved 1.5 percentage points to 37.8%

All these factors contributed to the strong flow of demand seen immediately after the trade opened late on Wednesday afternoon.

According to a source familiar with the matter, bookbuilding took only slightly more than two hours and would have been shorter if it had not been launched during lunch hour in European stock markets. European investors accounted for half of the final book.

In addition, the strong demand was also reflected by the fact that China Conch Venture was able to immediately exercise a $99 million upsize option on top of the $401 million base deal. That was despite the bond being price off its Tuesday close at HK$28.7 – just 4% below its all-time high.

However, from an earnings perspective the company's current valuation is not rich since it is only trading at around 7.5 times p/e on a one-year forward basis, according to one trader which subscribed to the new bond.

The zero-coupon convertible bond was marketed with a backend yield of 1.75% to 2.75% and a  conversion premium of 40% to 45%. In a somewhat uncommon structure, the issuer included an investor put option at the end of the second year, as opposed to the end of the third year, as with most Asian convertible debt issuers.

The terms were fixed at the investor-friendly end of 2.75% yield and 40% premium, translating to a strike price of HK$40.18. There is full dividend protection for all bondholders.

It is worth pointing out that China Conch Venture’s new bond has scarcity value in the Asia ex-Japan equity-linked market since there is no outstanding convertible debt by an environmental solutions provider.

Despite being an unrated, first-time debt issuer, China Conch Venture was able to come up with a credit assumption fairly quickly because it holds 18% of Anhui Conch Cement, the country’s largest cement maker by production volume. A/A/A3 rated Anhui Conch Cement is partially owned by the provincial government of Anhui.

Based on a credit assumption of 200 basis points and borrow cost at general collateral level, China Conch Venture’s new bond was issued with a 96.5% bond floor and an implied volatility of 23% at the final price.

Credit Suisse and JP Morgan were joint bookrunners on the convertible bond sale.

¬ Haymarket Media Limited. All rights reserved.
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