Disclosure filings made to the Hong Kong stock exchange on Monday confirmed that Jinjun, which is owned by Hong Kong tycoon Cheng Yu Tung through his Chow Tai Fook Nominee investment company, was the seller of the HK$7.78 billion ($998 million) worth of Ping An Insurance shares that went through the market on Wednesday morning last week.
The transaction, which comprised part of the shares that Jinjun bought through a private placement in March this year, was described as a public block trade that went largely under the radar as it was placed with just a small group of investors. It was arranged by Goldman Sachs and completed at a price of HK$64.85 per share, which was equal to Ping An’s closing price the previous day.
Monday’s filings revealed, however, that Jinjun didn’t do just one transaction last week, but two — in fact, it could have been even more as it is possible to combine several separate transactions into one filing. In addition to the 120 million shares that it sold through Goldman on August 24, it also offloaded 76 million shares on August 23 at an average price of HK$62.25. According to a source, Goldman was not involved in this first deal, which was worth about $607 million.
It also appears that Jinjun wasn’t really raising any new money. Rather it was using its existing shares to settle the short position in Ping An that it took up immediately after buying the shares in March. The short position amounted to 196 million shares and accounted for about 72% of the 272 million shares it initially bought. According to stock exchange filings at the time, the short position was in the form of cash-settled derivatives and sources have confirmed that their purpose was to allow Jinjun to hedge its Ping An position, since the initial private placement didn’t have final regulatory approval at the time of the sale and since it was also unclear whether Jinjun’s shares in Ping An would be subject to a lockup. In the end, a lockup wasn’t enforced.
The filing relating to August 23 shows that 76 million shares were used to reduce the short position to 120 million shares, and resulted in a drop in Jinjun’s total holdings from 272 million shares to 196 million. The fact that the transaction wasn’t crossed on the stock exchange — only 8.9 million shares were traded in Ping An that day — confirms that this wasn’t a traditional sale of shares.
On August 24, according to the filing, Jinjun used another 120 million shares in its long position to cover the remaining short position. Following this transaction, Jinjun owns just 76 million shares in Ping An and has no remaining short position. The filings state that the reason for the change in interest, both on August 23 and August 24, was an “event (other than an acquisition or disposal)”.
However, the August 24 transfer of shares, which was arranged by Goldman, was crossed on the Hong Kong stock exchange that morning, which suggests that a placement to external investors could have been used to raise the money needed to unwind the remaining short position.
However they were done, the outcome of Jinjun’s transactions last week is that its holdings of Ping An’s H-share capital has dropped to approximately 2.4% from 8.7%. This means that it will not have to disclose any further dealings in the stock, since its stake is below the 5% disclosure threshold.
The lack of transparency with regard to these transactions has added further to the controversy that surrounded Cheng’s investment from the beginning.
Ping An initially sold its shares through a private placement so that it wouldn’t have to issue any shares to the National Social Security Fund. When Chinese companies issue new H-shares through a public offering, they have to transfer the equivalent of 10% of the share issue to the NSSF and some companies have been getting around that by doing a private placement to a limited number of investors instead. Both types of transactions require the approval of Chinese regulators.
A key difference with Ping An’s share sale, which amounted to about $2.5 billion, was that it went to just one buyer. Despite accounting for only 3.4% of Ping An’s total share capital, or 8.7% of the H-share capital, the deal was also priced at HK$71.50, which represented a steep 12.5% discount to the latest market price. This caused disappointment among other shareholders who argued that it was unfair to offer such a preferential deal to just one investor. The March placement was also arranged by Goldman Sachs.
The fact that that same investor is now selling part of that investment 9.3% below the initial purchase price caused some confusion in the market last week and again raised questions about the rationale of the initial placement. With regard to the selling price, however, it is possible that Jinjun has made up the difference through its derivatives transactions.
Irrespective of the reasons for the sale, the Goldman-led transaction was well timed. It made use of a window that opened after a recovery in the US equity markets and it was completed just before China Life Insurance’s poor earnings prompted a major sell-off in Chinese insurance companies.
China Life fell 11.6% on Wednesday and despite a 2.7% gain yesterday is still down 17.1% from its pre-earnings close. The fact that the Ping An trade didn’t come at a discount helped support the share price, but it still fell 3.7% on the day of the deal. As of yesterday, it had fallen 4.2% from its price before the deal to HK$62.15.
A source said there is a lot of two-way flow in the Ping An stock and the transaction was largely driven by reverse inquiries, which explains the tight pricing. Investors were also generally optimistic that the Hong Kong market would trade up the following day after the US markets opened on a strong note on August 23. In the end, the Dow Jones index gained 3% that day.