Institutions sell $133 million worth of Lenovo shares

TPG, Newbridge Asia and General Atlantic offload part of their combined stake in the Chinese PC maker at a 3% discount.

Three institutional shareholders last night sold a combined $133 million worth of shares in Chinese PC maker Lenovo Group, offering investors a discounted buying opportunity outside the multitude of initial public offerings that are currently in the market.

Lenovo's shares have experienced good momentum since mid-July, though share price gains have waned since it released its first-quarter results in early August, and the deal was well received despite being marketed at a tight discount of between 2.5% and 3%. However, investors were clearly looking for a good bargain and the final price was fixed at the bottom of the indicated range for the maximum 3% discount versus yesterday's close of HK$3.66.

"The IPOs have brought a new dynamic to the market, but people are still very interested in placements," said a source. Among the benefits of buying shares through placements or block trades, he added, is that "the companies have a track record and the ability to trade out of them is a lot greater".

At 3.2% of the existing share capital and just over five days' worth of trading volumes, the Lenovo block was also small enough to be easily absorbed by the market. And the three sellers -- TPG, General Atlantic, and Newbridge Asia -- only sold a portion of their existing holdings, which limited any potential concern that they are selling because they have lost confidence in the stock or think it has reached a peak.

The sellers offered a combined 291.5 million shares at a price between HK$3.55 and HK$3.57 and the final price was fixed at HK$3.55. The deal, which was arranged by Goldman Sachs, was well covered by about 50 investors. Most of the demand came from Asia, although a handful of global, European and US accounts also participated.

TPG, Newbridge Asia (an Asian affiliate of TPG) and General Atlantic bought into Lenovo in 2005 in connection with the Chinese firm's takeover of International Business Machine's PC business, spending a combined $350 million. This was the second sell-down since the initial investment by the three private equity firms, which also raised $368 million from a placement in November 2007. Before this deal, they held preference shares and warrants that would translate into a joint stake of just over 8.3%. They have committed not to sell any more shares for the next 60 days.

Lenovo's share price gained 52% from mid-July to its recent peak of HK$3.94 on August 4, but has since flattened out. The stock is up 171% from its January trough, but off from the trading range around HK$5.50 where it hovered last summer, before the collapse in financial markets.

In the earnings report for the first-quarter, Lenovo said it had gained market share for both desktop and notebook computers, but added that the operating environment will continue to be challenging during the 2009/10 fiscal year (which ends March 31, 2010) as the global economy remains uncertain and enterprise customers are conservative about PC spending. The ongoing shift of in the product mix toward entry-level PCs also exerts pressure on its operations, Lenovo said.

However, it added that the outlook has improved slightly and the Chinese market offers good growth opportunities for the group because of the government's economic stimulus package, rural PC subsidy programme, and urban PC upgrade programme, as well as the adoption of 3G. Lenovo said it will enhance its distribution network to cater for these new growth drivers. It will also continue to control expenses and drive cost reduction to mitigate the impact from slow commercial demand and rising component price trends.

In a research note following the earnings release, Macquarie noted that Lenovo's revenues momentum was better than expected and drew attention to the fact that the company did break out of the sub-10% gross margin range where it had been stuck for the previous two quarters, partly thanks to strong cost controls. Operating margins returned to positive territory (0.4%) after two quarters of operating losses.

According to Macquarie, Lenovo's share price has historically been driven to a large extent by the operating margin trend line and therefore the company should now be in for further gains. "We expect Lenovo to post a recovery in operating margins in fiscal 2010 and fiscal 2011, thus we expect the share price to continue performing," analyst Patrick Yau said in the report.

Lenovo reported an 18% decline in revenues from the same quarter last year to $3.4 billion, and a net loss of $16 million. The latter was down from a net profit of $111 million a year earlier, partly due to higher financing costs.

Separately, Goldman Sachs also arranged a small selldown in Chinese online trade platform last night, which saw the company's founding chairman, Jack Ma, raise about $35 million. The deal comprised 13 million shares, or a 0.2% stake in the company, which were offered at a price between HK$20.78 and HK$21. The price range translated into a 3%-4% discount versus yesterday's close of HK$21.65, which was only 25 HK cents below the 12-month closing high of HK$21.90 where the stock had finished the day before.

A source said the deal was very well subscribed by about 30 investors and completed in just one hour. The final price was fixed at the top of the range for a 3% discount. This deal too went mostly to Asian investors.

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