Private equity firm KKR sold a 5.9% stake in Hong Kong-listed Far East Horizon (FEH) on Monday, becoming the second existing shareholder to conduct a stake sale of the group in less than a month.
KKR's HK$1.54 billion ($198.6 million) divestment follows a much smaller HK$507 million ($65 million) divestiture in mid-April when Singapore sovereign wealth fund GIC sold a stake in the Chinese leasing company.
Both offerings appear to have been timed to take advantage of strong share price appreciation over the past year, always a warning signal for potential investors. However, some analysts believe the rally still has plenty of room to run particularly as FEH is progressively expanding into the favoured healthcare sector.
However, any new placement was going to need a fairly substantial discount given the stock's recent performance, combined with the impact of two successive divestments by existing investors seeking to lock in profits. As such, the 195 million secondary share deal was priced at the bottom end of an indicative range spanning a 3% to 6% discount to the stock's HK$8.40 close.
The discount was, however, capped by the fact that sole bookrunner Citigroup won the deal as the result of a blind auction between a group of banks.
The deal was marketed on a range of HK$7.90 to HK$8.15 per share according to a term sheet seen by FinanceAsia. The book was closed at 8.30pm Hong Kong time and pricing completed shortly after at HK$7.90 per share.
A total of 40 accounts participated in the deal. These included hedge funds plus long-only accounts, some of which already owned the stock. The vast majority were from Asia, although there was also a smattering of interest from the US.
As a result of the deal, KKR has trimmed its stake from 17.9% to 12% and is subject to a 60-day lock up on future divestments.
The group's controlling shareholder is the state-owned Sinochem Group, which owns 27.9%. Other big shareholders include Cathay Life on 9%.
GIC's divestment, led by UBS in mid-April, was priced at HK$8.38 per share. This represented a 2.6% discount to the then closing price of HK$8.60 per share.
Back in October 2009, KKR and GIC acted in a consortium with CICC to purchase an estimated 30% stake in FEH for $160 million. The company was subsequently listed on the Hong Kong Stock Exchange in March 2011.
Valuation has upside?
FEH is up 63.7% on a one-year basis, but is still trading at only 7.19 times consensus 2015 earnings because its profitability has been rising so rapidly. Year-to-date, the stock is up a more modest 9.8%, although it went on a second tear in mid-March, rising 37.6% in the space of a month.
Over the past few weeks, it has been fairly range-bound. This suggests either the current rally has run out of steam, or the market has taken a while to absorb the last placement.
The new deal represents 37 trading days based on a three-month average daily trading volume of $5.4 million.
In mid-April, Maybank Kim Eng wrote an extremely favourable research report suggesting FEH is currently not very well understood by the fund management community. It believes its market cap could increase from $3.6 billion to $10 billion within a couple of years as it starts to feature on the radar screens of more investors.
It also believes its current target price of HK$12.50 could double within the same time period. "As they develop the hospital business they will be able to increase ROA significantly," it argued.
Since the beginning of 2014, FEH has spent Rmb500 million to acquire five specialist hospitals with 1,065 beds. The company has said it intends to spend a further Rmb3 billion to acquire 30 specialist hospitals with 10,000 beds before 2020.
Maybank Kim Eng comments that this acquisition spree could increase the ROA of the hospital business line from 3.37% in 2014 to 5% to 10% within the next two years. It also believes it will contribute about 10.5% of total revenues in 2017 up from 3.7% currently.
One of FEH's major competitors in this area is Hong Kong-listed Phoenix Healthcare, which has 3,390 beds. It is trading at a heady 42.2 times consensus 2015 earnings.
FEH's main business line is financial leasing and the company is China's largest non-bank affiliated leasing company. It specialises in the SME sector, allowing companies to borrow against their operating equipment.
One major comparable is Shenzhen-listed transport leasing company Bohai Leasing. It is currently trading at 22.56 times consensus 2015 earnings.
A major headwind for the entire sector is the likelihood of interest rate cuts, which will depress net interest margins (NIM). And most economists believe the central bank will almost certainly cut rates this year as it tries to hold up GDP growth of 7%.
Every 100bp cut in the policy rate will narrow FEH's NIM by 55bp. In 2014, it reported a NIM of 3.3%.
Net profit was up 20% year-on-year to Rmb2.3 billion in 2014. Loan receivables were up 24.9% over the same period.