Yue Yuen shareholders sell 3.5% of company

Tsai family defies rising oil price and anti-dumping quota concerns to offload $166.7 million shares at 5.3% discount.
Existing shareholders of Hong Kong-listed athletic shoemaker, Yue Yuen Industrial Holdings have raised HK$1.29 billion ($166.7 million) from the sale of secondary shares in the company, taking advantage of three straight days of share price gains.

It was the second time this month the Tsai family, who founded the company back in 1988, tried to offload these shares. On April 10 they pulled a planned placement before launch because, according to a Yue Yuen spokesman, they were unable to agree on a price with the underwriter. HSBC was mandated to arrange that sale.

This time around, the sellers switched banks to Morgan Stanley which completed the sale through an accelerated bookbuilding. The shares were offered at a slightly larger discount to the market price than was indicated last time, which may have helped convince investors to buy in despite some scepticism over the companyÆs growth prospects in a rising oil price environment.

Oil is a key component of many of the raw materials used by the company to make shoes for global brands like Nike, Adidas, Reebok, Asics, New Balance, Timberland and Rockport.

As far as the sellers go though, they received slightly less money than they would have according to the indicative terms on April 10, since the share price has actually dropped HK$0.40 since then. At that time the shares were to be offered at a discount of up to 4.8%, giving a share price range of HK$23.60 to HK$23.90.

Last night, the Tsai family offered 56 million shares that were sold at HK$23.10 apiece û the mid-point of the offered range - or at a 5.3% discount to ThursdayÆs (April 27) close of HK$24.40. They were marketed to investors in a tight range between HK$23 and HK$23.20, giving a discount of 4.9-5.7%.

The share sale accounted for 3.5% of the share capital and about 33-34 days worth of trading volumes. It will reduce the stake held directly by the Tsai family, which includes Chairman Tsai Chi Neng, to about 13.1% from 16.6%. However, the same family also controls Taiwan-listed Pou Chen Corp, which is Yue YuenÆs majority owner with just over 50% of the company.

Demand was said to have come predominantly from Asian and global accounts with about 20-25 investors receiving allocations, some of them existing shareholders who decided to increase their holdings.

The interest rate hike in China, which was announced during the bookbuilding did have some negative impact, as did the fact that there were several other equity deals being done in Asia yesterday that absorbed liquidity. According to one source, the deal was well covered although the bookrunners ômay have struggled if they had tried to price it at the top end of the range.ö

However, the fact that the deal was able to price in the middle of the range despite such noise and in spite of the company being on the ôwrong sideö of the rising oil price trend suggest interest was still quite solid.

Yue Yuen last month reported a slightly above consensus 16% increase in net profit to $85.9 million in its first quarter ending December 2005, on a 17.6% improvement in revenue to $878 million. According to the company, the growth continued in the first two months this year when turnover increased 18.8% over the year earlier period, but many investors have remained cautious amid a steady climb in oil prices.

The company is also affected by a trade dispute, which has seen the European Union slap anti-dumping duties on footwear made in China and Vietnam from the start of April. Yue Yuen makes shoes in both these markets as well as in Indonesia and at the time of the earnings release Chairman Tsai acknowledged that the company ôstill expect challenges ahead.ö

ôThe Group will closely monitor the potential impact of the trade dispute and increases in production costs in the remainder of the year,ö he said in a written comment.

Most of these concerns have already been priced into the stock, however, and the share price does have good long-term support at HK$22, one observer said. The price is up 12.7% year-to-date, and trades only 4.3% below its all-time high of HK$25.50 reached in June last year.
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