Hung Hing prints CB

Chinese paper company taps into demand for sector on eve of Nine Dragons' trading debut.
Hong Kong-listed Hung Hing Printing Group has raised HK$750 million ($97 million) from a convertible bond, which benefited from a keen appetite for ChinaÆs paper manufacturing sector that has been partly fuelled by Nine Dragons PaperÆs hyped-up initial public offering.

Coming on the eve of Nine DragonsÆ trading debut in Hong Kong today (March 3), Hung Hing was able to increase the size of its offering by 25% from an original HK$600 million after the order book was said to have attracted 98 accounts in just 90 minutes. The offer was 6.5-7 times covered at the final size, according to one investor.

About half of the investors are believed to have been Asia-based, while Europe accounted for about 30% and off-shore US for the rest. According to a trader, the bonds were trading slightly above par in the grey market late last night.

The Deutsche Bank led issue was priced at par and has a zero coupon structure, with a five-year final maturity and redemption price of 114.35%. There is also a two-year put option at 105.51% to give a yield of 2.7% and an issuer call after two years subject to a 130% hurdle.

The bonds were offered to investors at a yield range of 2.5% to 3%.

The conversion premium was fixed at the upper end of the offered 25-30% range, resulting in a conversion price of HK$6.76. The share price closed at $5.20 yesterday after rising 30% from a 33-month low of $4 in early December. It is still well below the all-time high of $6.70 from December 2003, however.

Underlying assumptions comprise a bond floor of 93% and implied volatility of 30.2%. This is based on a credit spread of 150bp over Hibor, full dividend protection, 5% borrow cost and 100-day volatility of 30.5%.

Trading in the stock is said to be quite thin and the 20% increase in the share capital that would result from a full conversion of the CB equates to about 222 days worth of trading.

Proceeds are being used for a new production facility in Heshan, Guangdong Province, and to upgrade existing plants in Zhongshan. An unspecified portion will also go towards refinancing of short-term debt.

One analyst remarked that the company has been expanding aggressively for about two years to meet the strong demand for packaging material from mainland manufacturers. Last year it raised its stake in two manufacturers in Zhongshan to 59% from 35%, enabling them to be consolidated into the accounts.

Even so, the share price was trending lower for the best part of 2005 as rising costs for raw materials and wages, as well as high oil prices led to sagging margins. In the six months to September 2005 the operating margin dropped to 13.8% from 16.4%, taking the edge of a 43.4% increase in turnover. Net profit rose 9.5% to HK$171.7 million.

But analysts are positive about the sector and the company going forward, as its new production plant in Heshan starts operations in the second quarter and demand for its paper products is expected to continue to increase.

Investors may have been drawn to Hung HingÆs bonds because of the scarcity of CBÆs out of Hong Kong/China. Aside from a highly structured pre-IPO CB from property developer Greentown, this is only the second CB in this market this year after Shenzhen Development raised $77 million via JPMorgan in January.

ôEverybody is looking for diversification and in combination with the fact that there is a lot of interest in the paper sector right now, the demand is not that surprising,ö one observer notes.




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