Small block trades send positive signals

Li Ning's founder sells a 2% stake in the sports retailer for $75 million, while Taiwan's Far Eastern Textile raises $61.3 million from the sale of Asia Cement GDRs.
Amid the continued volatility in global equity markets, getting a deal done has become very much about grabbing the window of opportunity when it arises and that is exactly what yesterdayÆs sellers did, allowing them to raise a combined $136.3 million

On a day when most of AsiaÆs markets were up significantly in response to a strong day on Wall Street, Li NingÆs founder and chairman raised HK$588 million ($75 million) from an upsized share placement, taking advantage of positive sentiment surrounding the company following a positive earnings report and a buying spree ahead of the stockÆs inclusion in the FTSE Asia-Pacific index today.

The Hong Kong-listed sports retailer is still trading 28% below its highs in January, but a 19.2% jump last Wednesday and an 11.4% gain yesterday have at least helped lift it off its lows. The Hong Kong market provided a good backdrop with a 6.4% rally as it played catch-up with the US after being closed both on Friday and Monday.

The Taiwan stockmarket was the only major Asian market that fell yesterday, but the 0.8% decline came on the back of a 4% jump on Monday as investors reacted positively to the election of Ma Ying-jeou, from the opposition Koumintang party, as the countryÆs next president. Market watchers are expecting the cross-strait relations with China to improve under Ma, which should be beneficial to companies with businesses in the mainland, especially companies like Asia Cement which would like to expand those businesses if allowed.

Asia Cement, TaiwanÆs largest producer of cement and other building materials, which was the object of the second placement has been a strong performer leading up to SundayÆs election and gained 5.7% on Monday. Despite a 3.9% correction yesterday it is currently trading only 4% below its five-year closing high from mid-January. The seller was Far Eastern Textile, which raised $61.3 million from the sale of a block of global depositary receipt after the Taiwan market closed. The GDRs were offered at a fixed price and the sale was completed in less than 1.5 hours, according to sources.

Both deals were obviously small, but still provided some positive news after the cancellation of three Hong Kong IPOs over the past two weeks as they showed investors are still willing to buy what they consider to be the right stock at the right price. This should be encouraging for a few other sellers that are looking to do a block trade, but are still waiting for the right moment. So far there has been only one other placement in Asia in March û the $1.1 billion sell-down in LG Display by Royal Philips Electronics.

With regard to Li Ning, the right price turned out to be at a rather wide 8.6% discount versus the close û especially when you consider the small absolute size of the deal and the fact that it accounted for only 3% of the company and less than five dayÆs trading volume. The 11% gain in the share price yesterday would likely have required a bit of extra leeway on the discount even if the stock is still well below where it was two months ago, as would the fact that it was chairman Li Ning himself who was selling shares. Such transactions often lead to a sell-off to some degree by other investors who fear the sale may be a signal insiders believe the share price has no further to go. Li, who is a former world champion in gymnastics, told investors that the majority of the money raised will be put into the charitable Li Ning Foundation.

Encouragingly though, the price was fixed inside the 5%-10% discount range that was initially offered and the deal was upsized to 30 million shares from 20 million.

The placement was priced at HK$19.60 after being offered in a range between HK$19.30 and HK$20.40 after a couple of long-only investors chose to raise their price limit in order to get a larger allocation. According to a source, the deal was about 1.5 times covered at the final price and saw the participation of between 20 and 25 investors. At the wide end it was multiple times subscribed, indicating that most investors still chose to submit their bids at the bottom to try and limit the downside in case the share price were to fall further. UBS was the sole bookrunner for the offering.

Li Ning last week reported a 60% increase in net profit to Rmb473.6 million thanks to a continuous rise in operating margins, lower tax payments and increasing demand ahead of the Beijing Olympics. The company, which sponsors the China national teams within gymnastics, diving, table tennis and shooting and is a partner of the Spanish and Swedish Olympic delegations, is planning to increase its Li Ning-branded retail outlets to 7,700 by the end of 2010 and to 10,000 by 2013 from 5,233 at the end of last year. To make the most of the demand for branded sports goods, it will also increase its penetration into second and third tier cities.

Analysts are positive on the stock with 22 buy recommendations and only two holds. The average target price is HK$27.71, which suggests 29% upside from its current level.

The Asia Cement block said less about price sensitivity since it was offered at a fixed price, but the discount was a lot tighter than for Li Ning at 4% versus yesterdayÆs Taiwan close of NT$55. The 3.5 million GDRs, which each represent 10 common shares, were offered at $17.53 each, which is equal to NT$52.80. The deal accounted for about 1.3% of the company and will reduce Far Eastern TextileÆs stake in the company to about 22.8%. The money raised will be used for real estate developments, but the seller made no mention of any specific projects.

Far Eastern Textile, which is the original business of Taiwan's Far Eastern group, and Asia Cement are linked through a cross-shareholding structure. In February Asia Cement sold $180 million worth of bonds exchangeable into Far Eastern Textile.

The GDR offering, which was arranged by Credit Suisse, was said to have been sold to a ôtight group of international investorsö including a few hedge funds. The latter is a positive sign as hedge funds have been quite reluctant to participate in block trades this year as they have been struggling to cope with losses incurred by their existing holdings.
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