Nine Dragons raises $370 million from top-up placement

Investors are happy to turn their attentions to something other than real estate, but poor trading in Asia and Europe make them ask for the maximum 10.9% discount.

Chinese paper manufacturer Nine Dragons Paper yesterday took advantage of a near 18-month high in its share price to raise $370 million from a top-up placement. About three-quarters of the money will be used to repay debt.   

The offering, which was upsized from a base deal of $350 million, was launched in the Hong Kong morning after the stock was suspended and stayed open until just before the start of New York trading to give US investors, who had met with the company during a non-deal roadshow earlier in the month, a chance to participate.

Demand was said to have been decent overall and many investors were probably grateful for the chance to buy a discounted stock outside the real estate sector, after four of the five IPOs in the Hong Kong market over the past week have been property developers. However, a melt-down in European markets yesterday -- the major indexes in London, Frankfurt and Paris were all down more than 2% -- saw some key investors already in the book add price limits to their orders. A 400-point decline in the Hang Seng Index and a 3% drop by fellow paper manufacturer Lee & Man Paper in Hong Kong earlier in the day also made investors a bit cautious and it was no great surprise that the deal was priced at the bottom of the indicated range for the maximum 10.9% discount.

The shares were offered in a range between HK$10.85 and HK$11.50, which translated into a discount of 5.6% to 10.9% versus Tuesday's close of HK$12.18. That close was only four Hong Kong cents below the 18-month closing high of HK$12.22 that the stock reached on Friday last week, which may also have contributed to the fact that investors wanted a bit of an extra buffer to pick up the shares.

Nine Dragons' share price has rallied more than 400% this year, but that recovery comes on the back of a sharp decline between September 2007 and October 2008 when the stock tumbled from a high of HK$26.25, suggesting there is still room for gains. Analysts are pointing to the upside margin potential in the China paper sector as supplies are expected to tighten in 2010 and 2011 following the closure of numerous small paper mills. According to a research note by Citi earlier this week, Nine Dragons and Lee & Man are both below their net dollar margins per tonne - Nine Dragons at Rmb302/tonne versus the long-term average of Rmb370/tonne; and Lee & Mann at HK$374/tonne versus a long-term average of HK$440/tonne.

Nine Dragons, which makes paper and linerboard for packaging products, is also in favour thanks to a new plant in Tianjin, which began operations last month. This plant in particular should record high net dollar margins, according to Citi, as the company has no major rivals in this geographic area.

According to a source, about 50 investors participated in the transaction. Asian institutions accounted for about 85% of the demand, while European and US accounts made up about 5% and 10% of the order book respectively. The deal relied quite a lot on existing shareholders.

The offering was launched at a fixed size of $350 million with an upsize option of $50 million, with the number of shares to be sold being determined only after the final price had been set. Based on the per share price of HK$10.85, and the use of $20 million of the upsize option, the company sold approximately 264.3 million shares. This translated into 5.6% of the company and about 16-18 trading days worth of stock.

Citi was the sole bookrunner.

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