Haier gives equity-linked market a spin

Chinese white goods giant executes an aggressively priced but well received deal that trades up despite stock price volatility.

Shanghai-listed Qingdao Haier breathed new life into Asian equity linked markets on Monday after completing a sizeable HK$8.8 billion ($1.025 billion) exchangeable into Hong Kong-listed Haier Electronics. 

The deal instantly lifted the year's regional issuance volumes by a third given only $3.1 billion was raised during the first nine months of the year and one third of that came from another jumbo exchangeable: Shanghai International Ports into Postal Savings Bank of China (PSBC).

However, the rationale behind the two jumbo equity-linked deals was very different. Shanghai Ports used the structure to monetise its PSBC holdings because a block trade would not work for a stock with low average daily trading volumes.

Where Haier Electronics is concerned, the deal was also large relative to the company's existing market cap and freefloat (14.5% and 33% respectively). This factor initially weighted heavily on the stock price when the deal was free to trade on Tuesday, although it re-gained most of its losses to close down just 1.59% by the end of the trading day.

The exchangeable closed Tuesday close to the 102% mark despite aggressive terms, which were ratcheted up further after the strength of demand became clear.

As a result, a fixed yield of 1.25% was squeezed to 1% and the conversion premium came in at 50%, the very top of the 40% to 50% range.

This is a high premium by recent standards and particularly in the light of a stock which is already up 79.97% so far this year. Bankers said the level demonstrated the company's confidence in future stock price performance, although it also acts as a barrier to conversion, which may well be something the company wants since full conversion would take its ownership of Haier below 50%. 

The deal also incorporates a provision limiting equity conversion before one year, longer than the typical 40-day period.

Otherwise the deal has a standard zero coupon and five-year maturity with three-year put and call options. The put option was priced at 103.4% and the call option with a 130% hurdle. 

The deal was issued at par and has a redemption price of 105.12%.

Underlying assumptions include a bond floor of 94.5%, implied volatility of 28% and fair value of 102.8%. This is based on credit spread of 120bp over Libor, 0.5% stock borrow cost and full dividend pass through.

Observers said over 100 accounts participated with a tilt towards outright over hedge fund investors. 

They also said global investors were attracted by the rarity value of such a sizeable Asian equity-linked deal and the strong brand attached to the Haier name. For if China's technology sector has the BAT troika of Baidu, Alibaba and Tencent, its white-goods sector has an equally well-known troika comprising Gree, Haier and Midea. 

All three have benefited from a consumer upgrading trend and strengthening domestic property market. Haier, for example, reported third quarter revenues up 27% to Rmb21.6 billion year-on-year and net profits up 21%.

Most analysts expect this outperformance to continue and retain buy ratings on the stock, which is now trading at 15.3 times consensus 2018 earnings forecasts compared to an 18.5 times peak in 2013. 

Haier is using proceeds to repay more expensive debt, largely owed to China Development Bank to finance its $5.4 billion acquisition of GE Appliances, which closed in the summer of 2016. DBS estimates the new exchangeable transaction has saved the group about 1% to 2% in interest costs.

Like many banks, DBS also believes Haier will spin off its logistics division within the next two to three years.

JP Morgan was sole global co-ordinator of the exchangeable.


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