Shun Tak Holdings’ share price jumped 9.2% yesterday, recovering all the losses it made last Friday after announcing a fully-underwritten rights issue of at least HK$1.65 billion ($212 million). The recovery was partly due to a continued gain in the Hong Kong stock market after the three-day lunar new year holiday, but also suggests that investors may have come around to the idea of doing a rights issue.
The company, which is controlled by the family of Macau casino tycoon Stanley Ho, said in an announcement that it has chosen to do a rights issue to enlarge its capital base without causing a dilution to existing shareholders (assuming they decide to participate). The money will be used for general working capital and to finance new investment opportunities. No investments were identified, however, which may partly explain the initial negative reaction to the proposed fund-raising.
Investors tend to be more receptive to fund-raisings if the company has a specific use of proceeds in mind. Shun Tak operates a high-speed ferry between Hong Kong and Macau, is involved in hotel operations, property development and investments, and owns a minority stake in a family company involved in the casino business.
However, Shun Tak is also offering the new shares at a fairly deep discount of 35.7% versus the closing pricing of HK$3.14 last Thursday, which may have put off shareholders who do not wish to participate in the rights offering. The discount versus the theoretical ex-rights price (Terp) is 28.7%.
The subscription price has been set at HK$2.02 per rights share and based on last Thursday’s close, the Terp works out at HK$2.83. Shareholders can buy three new shares for every eight shares they currently own.
The share price dropped 6.7% to HK$2.93 on Friday after the fund-raising announcement, but yesterday’s gain pushed it back up to HK$3.20 — the highest close so far this year. However, the share price is well below its 2011 high of HK$5.26, which it reached on June 1, which explains why the company is not keen to do a straight equity issue. Indeed, the lower the share price, the greater the dilution to the existing shareholders as the company will need to issue more shares to raise a set amount of money.
Although most have recovered from their lows, a lot of Asian companies are still trading at depressed share prices after the collapse in global equity markets in August and September last year. And according to a banker yesterday, this is likely to limit the number of new equity placements over the next few months. The solution for companies that need cash, he says, is to turn to rights issues.
“We are pushing rights issues and are hoping to do a few in the first half,” he said.
However, in order to prevent dilution with a rights issue, the controlling shareholders need to take up their entitlements in full, which means committing more cash to the business. Not every owner is prepared, or able, to do that, which suggests rights issues aren’t for everyone. But in Asia, where many companies are controlled by rich families, they tend to work relatively well.
Another recent example is the New World group, which raised a combined $2 billion from two rights issues in the fourth quarter last year: Hong Kong-listed New World Development sold $1.45 billion of new rights shares and then used part of that to subscribe to its full entitlement in a $551 million rights issue by its 69%-owned subsidiary, New World China Land. New World Development also acted as the underwriter for the rest of New World China’s offering, signalling strong support for the subsidiary’s business. In the end it didn’t need to buy any additional shares as the rest of the offering was fully taken up by other investors.
Support from the controlling shareholders is usually taken as a positive sign as it shows that they are optimistic about the outlook for the company and the share price.
With regard to Shun Tak, managing director Pansy Ho, her sisters Daisy and Maisy Ho, and a company called Hanika Realty, which is also controlled by the same family, have agreed to subscribe to their combined 39.4% entitlement in the rights offering and have also committed to underwrite the first portion of the remaining issue to ensure that the aggregate interest of the major shareholders remains unchanged at 53.6%. This underwriting commitment has been made by a company called Megaprosper Investments, in which Pansy Ho owns 51%, Daisy Ho 39% and Maisy Ho 10%.
The rest of the major shareholders comprise various other companies controlled by the Ho family.
Assuming no new shares are issued as a result of the conversion of outstanding convertible bonds or the exercise of share options, Megaprosper will underwrite 14.2% of the rights issue. The remaining 46.4% will be underwritten by HSBC and Platinum Securities. HSBC, which is also the sole global coordinator and bookrunner for the rights offering, will cover 75% of that commitment, while Platinum will cover 25%.
If additional shares are issues ahead of the rights issue due to CB conversion or the exercise of options, the size of the rights issue could increase to as much as HK$1.95 billion ($251 million) and the underwriting commitments of Megaprosper and HSBC/Platinum could increase slightly to 17.8% and 47.3% respectively.
The underwriters will get paid a fee equal to 2.75% of their respective underwriting commitment. This means that Megaprosper – or really Pansy Ho, Daisy Ho and Maisy Ho – will be able to cash in between HK$6.4 million and HK$9.5 million from the transaction. Of course, they will be spending significantly more than that to take up their combined entitlements.
Shun Tak’s shares will start to trade on an ex-rights basis on February 6 and shareholders who do not wish to participate in the rights offering can sell their nil-paid rights in the market from February 15 to 22. The rights offering will close on February 27.