Shanghai Industrial completes $388 million placement

The deal comes as the Hang Seng Index breaks 23,000 points and follows close behind the massively oversubscribed IPO for fellow Chinese investment company Fosun.
Shanghai Industrial Holdings, which is the Hong Kong-listed investment arm of the Shanghai municipal government, on Friday took advantage of a sharp rise in its share price to raise HK$3.02 billion ($388 million) through a top-up placement.

The UBS-led deal was priced towards the bottom of the range at HK$31.20, which translated into a 4% discount to the latest close, but meant the company was able to get fresh funds at a premium to where its shares closed only one day earlier.

The offering was likely timed to take advantage of the pent-up demand for Fosun InternationalÆs initial public offering on July 9, which was heavily oversubscribed and left most investors with just a small portion of what they had ordered. Like Fosun, Shanghai Industrial has investments in companies listed in the A-share market, which was the primary reason why investors were so keen on the recent IPO, and the company has been given a serious boost over the past month thanks to the increased attention.

On Friday, the share price jumped 5.4% to a new record high of HK$32.50, which brought the total gains since mid-June to 48%. The stock is up 96% so far this year, compared with a 15.7% rise in the Hang Seng Index.

Even so, the placement attracted over 50 investors and was said to have been about two times covered when it closed after about five hours of bookbuilding. Despite having kept the books open for US investors, the vast majority of the demand came from Asia.

According to one source, the book was driven mainly by long-only accounts and the number of hedge funds was quite low. The deal included one anchor investor who bought about a quarter of the shares on offer, however, which certainly would have helped to get the deal done. The anchor investor wasnÆt disclosed, but given the order book mix, it was believed to have been a long-only type fund.

According to bankers, the amount of liquidity in the market remains very solid and the fact that the Hang Seng Index continues to set new highs on a daily basis doesnÆt seem to have translated into concerns about a correction yet. The fact that an issuer can even launch a placement of almost $400 million on a Friday night in mid-July is a clear indication of the level of confidence investors have that the market will continue to head higher from here.

Despite the 15.7% gain year to date and a series of record highs û the latest one on Friday when it closed at 23,099 points - the HSI is still lagging other major Asian markets such as Korea (+36.8%), Singapore (+22.4%) and Taiwan (+21.1%).

Shanghai IndustrialÆs placement comprised 96.9 million shares or 10% of the company. They were offered at a price between HK$30.90 and HK$32.15, or at a discount of 1% to 4.9% to FridayÆs close.

The interest could have been at least partly sparked by the fact that the company said it would use the money for future acquisition opportunities û although it didnÆt specify further. The company had already attracted some interest after it announced at the end of June that it had bought a 40% stake in Shanghai Urban Development (SUD) for Rmb2.1 billion ($277 million). The state-owned company is involved in real estate businesses including sales, construction services and industrial investments.

At the time of that acquisition, Shanghai IndustrialÆs chairman Cai Lai Xing said real estate will become one of the companyÆs core businesses. With its strong balance sheet, low gearing and strong cash flow, the company is well positioned for the expansion and consolidation of real estate businesses and the investment into SUD will help it to quickly establish real estate as one of its core businesses, Cai said.

The companyÆs current portfolio also includes investments within infrastructure facilities, medicine, consumer products and information technology.

At the start of the roadshow, Fosun was marketed at sizeable premium to Shanghai Industrial, but as the latter has continued to climb that premium has been completely erased. However, Fosun is expected to trade up in todayÆs (July 16) debut, which means the PE multiple will expand and potentially create some room for further gains for Shanghai Industrial û if one is to look at the pair on a relative basis.

Based on the IPO price, Fosun is valued at between 18.7 and 21.9 times its 2008 earnings depending on which syndicate analyst one believes, while Shanghai Industrial is valued at 21.8 times, based on FridayÆs closing price and consensus forecasts compiled by Bloomberg. At the start of FosunÆs roadshow, Shanghai Industrial was trading at 15-16 times next yearÆs earnings.

Fosun priced its $1.48 billion IPO at the top of the range after attracting about $160 billion worth of demand. Retail investors submitted about $34.5 billion of that after ordering 233 times the amount of shares originally set aside for them. The institutional tranche was said to have been about 170 times covered after taking out the $220 million cornerstone tranche and adjusting for the fact that the retail tranche was increased to 50% after a full clawback was triggered. These numbers also assume a full allocation of the 15% greenshoe. China International Capital Corp, Morgan Stanley and UBS were joint bookrunners for Fosun's IPO.
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