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Kingboard Chemical prices block at the bottom

The $75 million deal features the widest discount on an Asian placement in more than two months.
Asia logged its third block trade this week when an unidentified institutional shareholder sold a 2.6% stake in Hong Kong-based Kingboard Chemical last night. Like the other two transactions, which both took place on Tuesday, this was a small deal at only HK$586.6 million ($75 million).

It was also priced at the bottom of the offering range, indicating that investors remain price sensitive even though the stock is trading only marginally above the 52-week low it hit last week. The placement price was set 3.4% below that low.

The 21.5 million shares were offered in a range between HK$27.25 and HK$28.25, representing a discount of 5.5% to 8.9% versus yesterdayÆs closing price of HK$29.90. A source said the deal had priced at HK$27.25 for the maximum discount of 8.9%, which is at the wide end of the discounts offered on overnight placements completed so far this year. The only one that has featured a wider discount (9.9%) is CapitaRetail Real Estate Investment TrustÆs $132 million fixed-price offering on January 25, which is also the only follow-on offering where a company has raised fresh capital. All the other deals have been sell-downs by existing shareholders. Bankers expect this trend to continue since companies arenÆt keen to sell equity at the moment, given the widespread decline in share prices so far this year.

The wide discount on KingboardÆs offering may have been partly a result of the fact that the deal, which was arranged by Morgan Stanley, was done off the trading desk rather than the syndicate desk. The offering also equalled just over 10 days trading based on the volume in the past 14 sessions, which represents a not insignificant amount of risk in the current volatile market. During the same 14 sessions, KingboardÆs share price has fallen 14.2% with no fewer than six days showing price swings of between 6.4% and 7.4% -- three up and three down. The share price is down 35% since the beginning of the year, which is almost twice the 18.5% drop in the Hang Seng Index.

There was no information last night about the level of demand, but the transaction was completed in just about one hour shortly after the market closed, suggesting at least some investors believe the share price is close to bottoming out. The fact that the seller is offloading stock this close to a 52-week low appears to suggest that it has lost confidence in the stock, although being a financial investor it could have decided to sell for any number of reasons unrelated to the companyÆs business outlook.

Analysts say the stock has suffered partly because of the overall market weakness, and partly because of the poor sentiment surrounding the semiconductor sector. In connection with its 2007 earnings release last week, Kingboard confirmed anecdotal evidence by saying that, at the beginning of this year, it experienced a softening of orders for laminates and printed circuit boards (PCB), which are used to make semiconductors, and while it expects volumes to improve it also sees lower margins year-on-year in these two divisions.

In 2007, an 8% dip in PCB earnings in 2007 was offset by a 170% earnings increase in the specialty chemicals division partly thanks to a full-year contribution from its Hainan methanol plant. Kenny Lau, an analyst with Credit Suisse, said he remains bullish about the chemicals business, which will be the key earnings driver for Kingboard in the future. In a research note published last week he projects 69% profit growth for the division in 2008 and added that the companyÆs ôclose-to-trough valuation underestimates the resilience of its businesses during industry weaknessö.

Credit Suisse rates the stock ôoutperformö and has a 12-month target price of HK$38.60, indicating 29% upside from current levels. Of the 11 analysts that cover the stock, according to Bloomberg, seven have a buy recommendation on it, three have a hold and one analyst advises clients to sell.
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