The five-year bond issue, which was arranged by Deutsche Bank, was increased from a base size of HK$600 million û since the greenshoe was exercised in full. It was priced in the middle of the indicated yield and premium ranges following solid demand, people familiar with the issue said.
Investors were offered the bonds at a conversion premium between 34% and 36% over the latest market price of HK$6.20 before the shares were suspended from afternoon trading yesterday.
The premium was eventually fixed at 35%, which is at the high end among CBs issued by Hong Kong-listed companies this year. Premiums on other issues, including Shenzhen International, Hung Hing Printing, Geely Automobile and Chaoda Modern Agriculture, have ranged between 20% and 30%. In December, paper manufacturer Lee & Man Paper sold a CB with a premium of 40%, however.
The yield on the FongÆs IndustriesÆ bond was set at 4.35% after being marketed in a range between 4.1% and 4.6%.
The bonds were issued at par and have a zero coupon, but are redeemable at 124.01%. Investors have the option to put the bonds back to the issuer at 2.5 years at 111.36% of face value. There is also an issuer call after 2.5 years, subject to a 130% trigger.
If fully converted, the company will have to issue new shares corresponding to 18% of its existing issued share capital. The shares underlying the CB also accounted for about 368 days of trading, based on the six-month average daily turnover, making it a sizeable transaction.
The attraction of this small-cap company with a market capitalization of no more than $450 million, according to one observer, is that it is ChinaÆs largest provider of textile finishing and dyeing equipment, which makes it a leveraged play on ChinaÆs growing textile manufacturing and export industry.
Based on the allocations received, fund managers estimated that the CB had been several times oversubscribed and the bonds were reportedly trading up slightly in the grey market. The immediate increase of the deal size was another indication of the demand, they said.
The technicals of the bond, including a bond floor of 94.7%, were seen to provide investors with enough downside protection for the estimated growth trajectory, the observer said.
The underlying assumptions also included a credit spread of 180 basis points over Hibor û a level at which Deutsche Bank provided a ôsufficientö amount of asset swaps û a full dividend pass-through and a 5% stock borrow cost.
That gave an implied volatility of 28.7%, which compared with a 100-day historic volatility of 33%.
Looking beyond the volatility, the share price has moved little in absolute terms, however. In the past 12 months it is down 1.6% and it is flat so far this year after a 1.6% drop yesterday.
FongÆs Industries posted a decline in net profit to HK$218.7 million ($28.2 million) in 2005 from HK$235.1 million in 2004, despite an increase in sales to HK$2.01 billion from HK$1.74 billion in the same period. The profit decline was attributed partly to ôinternal factorsö which were said to have hindered the performance of the companyÆs European divisions, partly due to ChinaÆs trade disputes with the US and the EU which hampered textile exports throughout 2005.
With those issues now resolved, the company chairman said in a written statement that he expects the groupÆs core textile dyeing and finishing machine manufacturing divisions to perform better in 2006.
Last month, the company said it intends to form a joint venture with Dutch textile printing company Stork Prints to manufacture, sell and service textile printing systems and auxiliaries. It has also recently acquired another textile machinery brand in Europe and launched a majority-owned joint venture with a UK firm that will market and sell a new patented vacuum bale steaming system.
The company is now in a position to target ôsignificant growthö in its core businesses within two years, the chairman has said.