While there was no shortage of demand, investors seemed a bit wary of the price, and the Morgan Stanley-led sale was completed at the bottom end of the price range at a 5.5% discount (to the rate at which the stock was suspended yesterday). WeiqiaoÆs shares currently trade at about 10 times forward earnings, which compares with 15 times and 10.8 times for fabric and garment manufacturerers Texwinca and Fountain Set, respectively. Both these companies are customers of WeiqiaoÆs.
The Shandong-based company offered 68.9 million shares at a price between HK$12.05 and HK$12.25, which represented a discount of respectively 5.5% to 3.9% to ThursdayÆs close. However, given the share price rallied Thursday morning the price of the placement represented only a discount of 2.8% to WednesdayÆs close.
The order book was said to have been 2.5 times covered with more than 40 investors participating. About 70% of the deal was expected to have gone to Asian-based investors and the rest to European accounts, according to one fund manager.
More than half of the book was also believed to have ended up with large long-only asset managers, many of whom did not hold any shares in the company previously and would have been unable to buy much of the thinly traded stock in the open market.
ôIt's a bit of a trend in Asia at the moment that companies are issuing new shares partly to provide liquidity to investors who have a demand for their shares,ö notes one banker.
The fact that Weiqiao said it would use the proceeds to expand its denim production, would have been another incentive for investors as this part of the business commands the highest margins and is currently operating at full capacity. That suggests the share sale will be earnings accretive, even though it will result in a 20% dilution of the existing share capital, one observer believes.
There was no immediate information on how much the company plans to increase its denim production capacity, which currently stands at 130 million meters per year. In the six months to June 2005, this business had a gross margin of 26.4%, compared with 24.4% for its cotton yarn operations and 10.6% for grey fabric, but accounted for no more than 7.4% of the revenues.
The interest in the placement also confirms that investor confidence is returning after the trade dispute between China, the EU and the US has hampered the mainland textile sector for the best part of a year.
WeiqiaoÆs share price has seen heavy fluctuations, but has gained no more than 3.2% in the past 12 months amid concerns over new textile export quotas. This is despite repeated reassurances from Chairman Zhang Bo that the trade dispute would have no impact on his company, which derives only about 6% of its revenues from sales to Europe and the US. About 60% of the revenues come from China and another 20% from Hong Kong customers.
From a low in late October, the share price is up 44% however and yesterday it hit a 12-month high of $12.80. It was quoted at $12.75 when the shares were suspended for the placement.
The chairman also helped pump additional confidence into the stock in mid-November when he said the company is planning to grow massively starting from 2007 after two yearÆs of consolidation, with the expected completion of one major expansion project in 2008 and another in 2010.
Weiqiao is already the largest cotton textile manufacturer in ChinaÆs fragmented textile industry and reported a 51% surge in revenues in the first half of last year to Rmb6.916 billion. Net profit improved 32% to Rmb472 million.
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