Hong Kong placements defy pessimists by pricing tight

Kerry Properties prices its top-up placement at a 5% discount, while Beijing Enterprises achieves a 5.6% discount despite a share price rally.
The Hong Kong capital markets withstood an important test yesterday with the completion of two follow-on offerings at discounts that were significantly narrower than on the few deals that were completed a couple of weeks ago.

Kerry PropertiesÆ upsized offering raised HK$4.15 billion ($533 million) at a 5% discount to the latest close, while Beijing Enterprises Holding sold HK$3.71 billion ($476 million) worth of shares at a 5.6% discount. Both deals were top-up placements, which means an existing shareholder sold secondary shares to the market and then subscribed to the same number of new shares at the same price to allow the company to pocket the proceeds.

Notably, both placements were priced inside the wide end of their respective indicative ranges, suggesting investors have become less nervous about the market direction after the US Federal Reserve lowered its benchmark interest rate on Tuesday. The 50bp cut has sparked hopes that the US will be able to get through the subprime crisis without slipping into a recession and has pushed the Hang Seng Index 4.6% higher in the past two days to a close just above 25,700 points yesterday.

Still, when Kerry and Beijing Enterprises launched their respective offerings early yesterday morning, they were met with scepticism both by market watchers and bankers who worried that the offering ranges may be too aggressive. According to market sources, even some bankers involved in the deals were privately wondering whether the market was ready for this, given that it has only just come out of a deep correction and volatility is still very high.

Both deals were mandated on Wednesday evening after active bidding by several banks. The bidding process was completed too late to allow the deals to be launched that night, however, which meant the bookrunners had to take a significant risk on the terms as they had no way of knowing whether the US markets would continue to hold up.

But the concerns proved to be largely unfounded, with both deals well oversubscribed. It may be too early to argue that the market for placements and block trades is fully recovered, but observers say yesterdayÆs successful deals are likely to encourage other issuers and banks to tighten the discount ranges on upcoming offerings.

Kerry Properties priced its deal well above the mid-point at HK$59.23 after offering it to investors in a range between HK$58.05 and HK$59.86 (a discount of 4% to 6.9%). The original deal size of 60 million shares was also increased to 70 million, after sources said the book was close to two times covered when it closed after six hours of bookbuilding. At the final size, the deal accounted for 5.3% of the existing share capital.

The Hong Kong-based property developer, which is controlled by Malaysian tycoon Robert Kuok, told investors it would use the money to develop its property business in China. Citi was the sole bookrunner for the offering.

Beijing Enterprises, a conglomerate controlled by the Beijing municipal government with interests in breweries, retail, property development, toll roads and gas distribution among others, sold 100 million shares or about 9.6% of the company at HK$37.10.

The shares were initially offered at a discount range of 3% to 7%, or at an absolute price between HK$36.55 and HK$38.10. This meant the final price was set in the lower half of the indicated range, which wasnÆt that surprising as most observers argued that its terms were the most punchy of the two in light of a huge share price rally the day before the placement. The deal size also equalled about 50 daysÆ worth of trading volume.

However, sources say the deal attracted about 130 investors and ended up approximately four times covered. The companyÆs good earnings profile and recent target price upgrades likely helped fuel this interest. One person familiar with the deal notes that the book included several chunky good quality orders from long accounts out of Europe, while the rest was a mix between hedge funds and long-only investors in Asia. This deal was also open to onshore US investors, but the interest from there was quite small.

Goldman Sachs, Lehman Brothers and Macquarie Securities were joint bookrunners for this deal.

Kerry Properties too was said to have attracted the attention of good quality long-only accounts, including some specialised real estate funds. This deal was no doubt helped by the recent focus on China property plays with three Mainland developers currently in the market with initial public offerings. Beijing-based residential developer Sino-Ocean Land Holdings, which is a few days ahead of the others, was due to close its books at 5am this morning Hong Kong time and is said to have been ôa complete blow-out.ö With a full day left to go in the bookbuild, sources said the institutional tranche had already attracted more than 1,000 orders.

ôWith the interest rate cut, the whole property sector is on fire,ö one observer says.

However, he notes that the desire to participate in yesterdayÆs placements is probably also partly due to the fact that the investors who picked up stock in AlcoaÆs sell-down of Aluminum Corp of China (Chalco) on September 12 have already made a 12.8% gain. That placement was done at a 15% discount to the closing price at the time, though, meaning the existing investors havenÆt been so lucky.

The Chalco placement was part of the reason why the market had come to expect that a wider discount of perhaps up to 7% or 8% would be necessary to get placements away as long as the markets remain volatile. True, Alcoa is widely regarded as having been a bit extra generous because of the large size of its divestment ($1.97 billion), but two of the three other placements for Hong Kong-listed companies that have been completed since the market started to recover in the second half of August also fetched sizeable discounts of 7.5% and 11.4% respectively.

A secondary share placement in consumer electronic products retailer Gome Electrical Appliances that was in the market last night also seemed to follow that trend, offering a discount of up to 8%. According to sources, an undisclosed shareholder were looking to sell about $300 million worth of shares with the help of China International Capital Corp û an investment bank seldom seen on Hong Kong placements.

The talk on Wednesday night was that investorsÆ request for a larger discount would have increased further after the Hang Seng Index jumped 4% on that day alone. Many individual stocks also recorded much bigger gains than that, including Kerry Properties, which added 8% to a record high of HK$62.35, and Beijing Enterprises, which rallied 14.6% to a nine-year high of HK$39.30.

Excluding those gains, the Kerry share placement was actually done at a 2.6% premium to TuesdayÆs closing price, while investors had to pay a premium of 8.2% over TuesdayÆs close for Beijing Enterprises. Both stocks were suspended from trading yesterday as the placements were being completed.

But as noted earlier, investors appeared happy enough to buy into both Kerry and Beijing at the offered ranges, as indicated by the fact that neither deal priced at the bottom. The average order sizes remained small, however. The real test will come when the stocks resume trading today. A significant decline then could again make investors nervous, and given that equity markets in both Europe and the US were down slightly overnight, the possibility of this happening seems real enough.
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