Controlling owner sells $162 million of Huabao shares

The stock is up 16% this year and has more than doubled since August as consolidation within the tobacco industry drives demand for flavouring products.
The controlling shareholder of tobacco and food flavouring company Huabao International Holdings, chairwoman Chu Lam Yiu, on Tuesday sold HK$1.26 billion ($162 million) worth of stock after the share price rallied 16.8% in the first two weeks of the year.

The stock is benefitting from a positive sentiment towards ChinaÆs cigarette manufacturing industry as a whole and there has been no shortage of buyers in the past month after the company reported that its interim earnings to September had improved by 251%. Following the reverse takeover of a listed company in August, the management has also done two international roadshows to explain its business, which helped pave way for this sale.

ôHuabao is the biggest and best known of the Chinese producers of flavours and fragrances and the company has delivered on its promises,ö says one observer with regard to the strong interest.

Many funds have found it difficult to buy a sufficient amount of the still quite illiquid stock in the market, however. As a result, the placement attracted demand from a group of very high quality investors who were willing to disregard the fact that the shares have more than doubled since the company restored its public float to just above the required 25% following the backdoor listing. That placement, which was completed in early August, was done at HK$2.20 per share.

This is not to say that investors were willing to pay any price, however, and according to a banking source the deal ended up being priced towards the low end of the offered range to ensure as good a mix of investors as possible. At the final price, there were about 40 investors in the book with a good balance between European and Asian accounts and some limited interest from the US. The buyers were fairly evenly split between new and existing investors with a bias for long-only funds, the source said.

The deal accounted for about 80 days worth of trading and saw Chu Lam Yiu cut her stake to 65.8% from 74.9%.

The sale comprised a total of 277.3 million shares, including an upsize option of 69.3 million shares that was exercised immediately. The price was fixed at HK$4.56 after the shares were marketed in a range between HK$4.50 and HK$4.75.

The final price represented a discount of 7.5% versus MondayÆs closing price of HK$4.93, compared with the offering range discount of 3.65% to 8.72%. When the stock resumed trading Wednesday after a one-day suspension it dropped through the placement price to a low of HK$4.52, but recovered to finish the day at HK$4.60 û down 6.35% versus Monday's close.

One reason for the drop may be that this time the sell-down was viewed as more opportunistic. However, the fact that the controlling shareholder wants to realise some of the hefty share price gains is hardly surprising. The small size of the offering (9.1% of the company) in relation to her overall holdings also suggests that the sale isnÆt prompted by any lack of confidence in the future share price performance, argued the observer.

Indeed, several investment banks have issued favourable reports on the sector and on Huabao over the past couple of months. In a piece published January 5, analysts at Macquarie noted that the flavouring industry is one of the best ways to play the ongoing consolidation among Mainland tobacco companies since none of the major tobacco groups are listed.

They went on to say that Huabao one of the key beneficiaries as its customers include the 10 biggest cigarette manufacturers, which are the drivers of the consolidation trend.

Huabao became a listed entity after it paid HK$4 billion ($515 million) to acquire Hong Kong-listed Chemactive Investments, which was essentially a listed shell company comprising a loss-making consumer electronics business. Ms Chu controlled 70% of Huabao at the time and was also the sole owner of Chemactive.

Deutsche Bank was the sole bookrunner for TuesdayÆs placement as well as for the August placement to increase the free-float. Deutsche also acted as joint financial adviser to Huabao together with DBS Asia Capital with regard to the acquisition of Chemactive.
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