Morgan Stanley sells $80 million block in Shanshui Cement

The US investment bank's private equity arm trims its pre-IPO stake in the Chinese cement producer for the second time in under three months.

Morgan Stanley Private Equity last night took advantage of the improved sentiment in the Hong Kong stockmarket over the past couple of days, as well as a renewed focus on the cement sector thanks to an ongoing initial public offering, to sell another batch of shares in China Shanshui Cement Group. This quick placement was priced at the top of the range, which resulted in total proceeds of HK$620 million ($80 million).

This was the second time in under three months that Morgan Stanley's private equity arm trimmed its stake in Shanshui Cement. On April 29 it teamed up with CDH China Fund to sell a combined $129 million worth of shares. Since then, the share price has risen 25%, which would have made it tempting enough to offload a few more shares after the lockup from the previous sell-down expired at the end of June. Morgan Stanley Private Equity and CDC both invested in Shanshui before its IPO in July last year.

The deal, which was completed in just 40 minutes, comprised 125 million shares that were offered at a price between HK$4.86 and HK$4.96 -- a discount of only 3.1% to 5.1% versus yesterday's close of HK$5.12. The final discount of 3.1% is quite tight compared with other recent Hong Kong placements, especially when considering that the deal accounted for 14 days' worth of trading volume.

It is also tight compared with the previous sale in April, which was priced slightly off the top of the range at HK$3.78 for a 7.8% discount. However, that transaction came on the back of a 37.5% rally in the previous seven days and was also done off a record high close of HK$4.10, which would have given investors some extra bargaining power with regard to pricing.

By comparison, Shanshui's share price has retreated slightly since it hit a new record high of HK$5.41 on June 22 and for the past few weeks, which have been characterised by a more cautious sentiment in the overall market too, it has been range trading. Yesterday it gained 5 cents, or 1%. The stock is up 82.8% from its IPO price of HK$2.80 and 488% above its record low of HK$0.87, which it hit in late October last year.

As indicated by the rapid bookbuilding and the top-end pricing, investors were still keen to participate in the offering, and more than 70 investors were said to have submitted orders. According to a source, the buyers included existing investors who continue to add to their positions even as the share price trends higher.

Sell-downs by the pre-IPO investors have the added benefit of increasing the free-float, which should help improve the daily liquidity in the stock and make it easier for investors to get out quickly should they need to. That typically also makes them more comfortable to invest. Yesterday's sale accounted for about 4.5% of the company and will increase the free-float to about 42.5%. The previous sell-down in April boosted the free-float from 28% to about 38%.

Morgan Stanley Private Equity will still own about 12.5% of Shanshui after this deal, which will be subject to a 45-day lock-up. CDH has a 5% stake.

Shanshui is one of the smallest among the Hong Kong-listed Chinese cement producers, but the leading player in its target region. Consequently, it is viewed as one of the key beneficiaries of the government's $585 billion stimulus programme, which because of its heavy focus on infrastructure is expected to result in an increase in demand for cement. According to a research report published by HSBC this week, China's cement production increased by 12.5% in the first five months this year, compared with 2.3% growth in 2008, and sales are moving up alongside it. The bank also expects the cement producers will see a widening in gross margins this year as sales volumes increase and coal prices remain weak.

Shanshui posted a 154% increase in net profit in 2008 to Rmb539 million ($79 million) on the back of 81% revenue growth and an improvement in gross margins to 21% from 19%.

The cement sector is making headlines at the moment as BBMG Corporation is on the road marketing what looks set to become the second largest IPO in Hong Kong so far this year. The company, which is the largest supplier of building materials, including cement, in Beijing, Tianjin and Hebei province and is also involved in property development and investments, is looking to raise about $700 million at a 2009 price-to-earnings multiple of 11.3 to 13.9 times. Shanshui is currently trading at about 13.5 times.

All six analysts who follow Shanshui, according to Bloomberg, have a buy on the stock and Macquarie views it as the best pick among the smaller cement companies due to solid volume growth and its more stable pricing.

"We think the organic growth profile of the business remains positive and the niche strategy of sticking to local markets will also see the stock well placed on a medium-term view," Macquarie's Andrew Drake said in a report published in mid-June.

The Shanshui transaction was arranged by Morgan Stanley, which surprisingly was not mandated on the first sell-down in April even though its own private equity arm was one of the sellers. That deal was arranged by Credit Suisse, which was a joint bookrunner on the IPO together with Morgan Stanley.

The US investment bank also helped an undisclosed shareholder to sell about $90 million of stock in Chinese car maker Geely Automobile on Tuesday. That deal was just as well received and in fact went even quicker than the Shanshui trade with the books open for just 30 minutes. A significantly deeper discount of 13% versus the closing price of HK$1.61 would have added to the attraction.

The seller offered just over 500 million shares, or about 7% of the company, at a fixed price of HK$1.40.

"For the past six to seven weeks, people have been taking money off the table and now when the bigger picture looks pretty good again, I think they are looking to get renewed exposure to the market," said one source. "And blocks, even at a 3% discount, are quite interesting for the right companies."

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