IPO pause opens the door for HK placements

After a couple of weeks with all eyes on initial public offerings, investors last night had two Hong Kong placements to choose from. Chairman Chu Lam Yiu continued to reduce her holdings in Huabao International Holdings with a second sell-down in six months, raising HK$1.16 billion ($150 million). And Tianneng Power International raised fresh capital from a HK$387.5 million ($50 million) top-up placement that comprised both new and existing shares.

The wave of Hong Kong IPOs that hit the market in September is coming to an end with the pricing of the final deal yesterday (see separate story on our website today) and the trading debut of four companies today and tomorrow, and while a few new listing candidates have started pre-marketing, the timing of their actual launches remains in question after most of the September IPOs have fallen below issue price. This -- and a couple of strong days in the Hong Kong market -- opened the door for bankers to approach investors with the two placements.

Both deals attracted good interest, but in the end, priced at the bottom of their ranges. With regard to Huabao, a source said there were a few big orders that drove pricing, while separate sources suggested that Tianneng could have priced higher but chose not to be too aggressive in light of the poor aftermarket performance by the recent Hong Kong IPOs, which has left investors feeling "a bit jaded". A small-cap stock with a market capitalisation of just $530 million, Tianneng also gave investors an added incentive to come into the deal by offering a very wide discount, ranging from 7.5% to 14.8%.

The Huabao shares, on the other hand, were offered at a tight discount of 4.5% to 5.7%, which together with the fact that the stock is not very liquid meant there were hardly any orders from hedge funds. Instead, a large portion of the deal was bought by existing shareholders, who chose to take advantage of the availability of a meaningful amount of shares to top-up their holdings. To do this in the market would have taken a lot longer, and would also likely have been a lot more expensive, since Huabao only trades about $4 million to $5 million in volume per day.

A tobacco flavouring company with a market cap of $3.3 billion, Huabao is the dominant company in its industry and is viewed as a good way to gain exposure to China's growing cigarette market. The company is the primary supplier of flavourings to nine of China's top-10 tobacco makers and its high cash flow, low capex requirements and wide margins make it quite a defensive consumption sector stock. Of the 14 analysts who cover the stock, 10 rate it a "buy" while two analysts view it as a "hold" and two as a "sell". The company also has a strong long-only shareholder base, which proved very useful for anchoring down last night's placement as many of them came in with good-sized orders. According to a source, the shares were placed with about 20 accounts.

The chairman offered 150 million shares at a price between HK$7.75 and HK$7.85 and the final price was fixed at HK$7.75 for a discount of 5.7% versus yesterday's close of HK$8.22. The discount was less than half the 12.5% that was used on the placement in April, when Chu raised $149 million from the sale of 190.5 million shares.

Yesterday's sale accounted for 4.8% of the existing share capital and will see chairman Chu's stake drop to 51.3%. The deal included an upsize open that would have allowed her to trim her holdings right back to just above 50%, but this wasn't exercised.

Chu has been trimming her stake as a way to diversify her portfolio and further sales may be tempting as Huabao's share price has risen 17.9% since Chu's previous sale in April. The shares are up 140% from a low of HK$3.40 a year ago, but have been trading largely sideways after hitting a high of HK$8.916 in mid-July. That said, Chu has earlier indicated an intention to stay above 50% and her remaining shares will now be locked up for 90 days.

Surprisingly, the placement was arranged by J.P. Morgan. The last few Huabao deals, including the April sell-down and the company's backdoor listing in 2006, have all been arranged by Deutsche Bank.

Huabao became a listed entity after it paid HK$4 billion ($515 million) to acquire Hong Kong-listed Chemactive Investments, which was essentially a listed shell company comprising a loss-making consumer electronics business. Chu controlled 70% of Huabao at the time and was also the sole owner of Chemactive.

Meanwhile, Tianneng Power, which makes batteries for electric bikes and for solar and wind energy storage and is involved in the development of a lead-acid motive battery to fit electric cars, sold 110.8 million shares with the help of Bank of America Merrill Lynch. Some 72% of the shares were new, which allowed the company to raise $36 million worth of new capital that will be used to upgrade the technology at its production facilities and to make an investment into a lead recycling plant.

The remaining shares were sold by a group comprising the chairman and senior management, which held a combined 51% of the company before the sale. The shares were offered at a price between HK$3.50 and HK$3.80 and sold at HK$3.50 apiece for a discount of 14.8% versus yesterday's close of HK$4.11. According to a source, the wide discount was deemed justified in light of the company's small-cap status. This was Tianneng's first top-up placement since it listed in 2007 and the company wanted the execution to go well, the source said.

The placement also came on the back of a 337% gain in the share price so far this year and an 82% rally in the past three months.

The deal, which accounted for 11% of the existing share capital, was covered in less than one hour and, after staying open for US investors, it attracted about 40 accounts in all. The allocation was tight with the top 10 accounts taking 95% of the deal. As a result, the great majority of the shares went to long-only investors.