Yingde Gases block

Pre-IPO investor cuts stake in Yingde Gases to below 5%

Baring Private Equity sells down its holding in Yingde Gases to raise $52 million after a 32% gain in the share price during the past month.

Baring Private Equity last night sold slightly more than one-third of its remaining shares in Hong Kong-listed Yingde Gases through a block trade, raising HK$402.5 million ($52 million). While small in size, the transaction shows that investors are willing to commit capital to the right names and that deals can get done if the sellers act quickly and make use of the brief windows as they open up.

In this case, the sellers sensed an opportunity when the Hong Kong stock market rebounded sharply in the afternoon to finish 1.9% higher. The gains came after two days of declines and were matched by positive markets in Europe and the US as well.

The transaction also highlights that despite the difficult market environment in the past three months, there are shareholders who are sitting on sizeable gains and who are keen to take advantage of any further recoveries to take profits.

However, this particular deal does also fit in with a recent trend that has seen long-only funds shift from cyclicals to more defensive stocks. And that is perhaps not the most positive of signals.

China-based Yingde Gases makes industrial gases that are used for the production of steel, chemicals, coal and glass among other things. Most of its production facilities are at the site of its customers’ plants and it gets about 80% of its sales from long-term take-or-pay contracts, which makes its sales volumes less volatile and helps guarantee a minimum off-take from its facilities. It also provides a lot of earnings visibility.

The company’s share price took a big hit in August along with most other stocks, but after a 32% gain in the past month it is now back at the levels where it traded before that collapse. And as of yesterday’s close, it was also 23% above the price fetched at its $409 million IPO in October 2009.

Baring was a pre-IPO investor and therefore would have bought its shares well below the IPO price. It has reduced its stake through the capital markets once before, in April 2010, when it sold 100 million shares at HK$8.50 apiece. It also sold some shares in the IPO.

This latest sale, which accounts for about 2.7% of Yingde Gases’ share capital, will reduce Baring’s holdings to about 81.1 million shares or 4.5% of the company.

Baring offered 50 million shares at a price between HK$8.05 and HK$8.25, which represented a discount of 4.2% to 6.5% versus yesterday’s close of HK$8.61. The demand was said to be of high quality, but price sensitive, and the price was fixed at the bottom of the range for the maximum 6.5% discount.

This was wider than the two block trades in Samsung Life and Hyundai Glovis, which both hit the market on October 18 after a near six-week drought of block sales in Asia. Both deals were significantly larger than last night’s trade in Yingde Gases at $300 million (Samsung Life) and $230 million (Hyundai Glovis), but came at a 5% and 3.8% discount respectively. The market has remained volatile, however, and despite hopes for more activity, no further blocks have been launched since then — although two placements of new shares were done on Friday last week and Monday this week for CapitaMalls Malaysia Trust and CapitaMall Trust. Notably, both of these are also largely defensive stocks.

According to sources, the Yingde Gases block saw strong demand from global long-only investors, which helped anchor the deal. There was also good support from the company’s existing institutional shareholders. Encouragingly, the buyers included some European investors that haven’t been participating in Asian deals for some time, as well as some long-only accounts out of the US.

Aside from the money raised, this sale was important for Baring since it took its holdings in Yingde Gases below 5%. That means it doesn’t have to disclose any future sales, making it easier to sell in the open market. Its remaining shares will be locked up for just 30 days. Being a financial investor, the private equity fund was always expected to continue to reduce its stake, and as a result sale is unlikely to be taken as a negative sign by the market.

In addition to its steady revenue base, Yingde’s raw material is also free since its gases – nitrogen, oxygen and argon – are separated out of air. In its interim financial results, the company noted that rising environmental standards are boosting the demand for industrial gases. For instance, Chinese steel plants have increased their use of oxygen since the beginning of this year in order to reduce their dependence on coke and electricity, which allows them to conserve energy and reduce emissions.

This, together with an ongoing trend that is seeing more companies outsource their gas production, enabled Yingde Gases to sign 11 new on-site gas supply contracts in the first half of this year. As of the end of June, it had 31 on-site facilities in operation and 23 new facilities under development. It is currently the largest independent on-site supplier of industrial gases in China.

In the first half of this year, its revenues increased by 56.5% year-on-year to Rmb2.01 billion ($316 million) and its net profit grew 51.1% to Rmb492 million.

UBS arranged the trade.

¬ Haymarket Media Limited. All rights reserved.
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