business

Hong Kong's IPO Market on the Upswing

Pre-IPO shareholders cash in $702 million worth of shares in Belle, while an undisclosed seller offloads $87 million of stock in Shenhua Energy

A strong day in the Hong Kong stockmarket yesterday prompted shareholders of two major companies to sell part of their holdings, raising a combined $789 million. One might question why they are selling while the stocks are still well below their highs, but the two block trades in shoe manufacturer and retailer Belle International Holdings and coal miner China Shenhua Energy nevertheless sent positive signals to the market.

Belle was priced above the mid-point of the range, suggesting investors are prepared to pay a bit more to increase their exposure. The smaller Shenhua block was offered at one of the tightest discounts of any Hong Kong placement this year and even though it priced at the widest end of the range, the final price was still above the previous day's closing price.

Together with the increase in the number of placements over the past week, this points to an increased level of confidence both among investors and issuers and indeed among the banks that take on these deals. A couple of strong days in the Hong Kong market at the end of last week and another good one yesterday, when the Hang Seng Index gained 1.6%, has likely helped. Although still somewhat volatile, the index has is now 15% above its lows from mid-March.

The Belle transaction was by far the biggest of the two at HK$5.47 billion ($702 million), although just over half of that was bought by a group of management shareholders, which reduced the portion of stock that had to find buyers in the market. Including the management portion, this was the largest placement in a Hong Kong-listed company so far this year, exceeding the $600 million sell-down in Cheung Kong (Holdings) in early January.

In total, the three pre-IPO shareholders sold 710.755 million shares, with 350 million shares ($345 million) going to the market and 360.755 million to the management shareholders. Morgan Stanley was the sole bookrunner.

The shares were offered in a range between HK$7.50 and HK$7.80, which represented a discount of 4.9% to 8.5% over yesterday's close of HK$8.20. The final price was fixed at HK$7.70 for a 6.1% discount. This was the first Hong Kong placement to price in the upper half of the indicative price range since IBM's sell-down in Lenovo in late February. That deal was a lot smaller at about $80 million, but was priced at the top of the price range at a tight 3% discount. Most deals (excluding those that were offered at a fixed price) have priced right at the bottom as investors have sought downside protection in case of a share price tumble.

A source says it took only 45 minutes for the deal to get covered and in total it attracted more than 60 accounts. More than 70% of the demand came from global and Asian long-only investors and the allocations went the same way. According to investors, the portion of the deal that was sold to the market appeared to have been more than four times covered.

One explanation for the popularity is that this was a big liquidity event in Belle, accounting for 8.4% of the share capital and 44% of the free-float. The total block represented 56 days worth of trading, based on the average daily trading volume in the past six months, and the 350 million shares that went to institutional investors would have taken the equivalent of 28 days to sell in the open market. Belle listed in May last year following a highly popular IPO that raised $1.3 billon. This was the first sizeable block of shares on offer since then.

The stock dipped below the HK$6.20 IPO price during intraday trading at one point in March but has recovered and is now well above that, although yesterday's close is still 37% below the record high of HK$13 in early November. For investors who believe the stock will return to those levels this was obviously a great buying opportunity. Analysts are generally positive on the stock with 15 out of 17 having a "buy" rating on it. The remaining two recommend investors to "hold". Their average target price is HK$10.44, implying a 26% upside from yesterday's close.

The majority of the shares, or 490.755 million of them, were sold by a company wholly owned by Bell chairman Y Tang.

Meanwhile, a Morgan Stanley private equity fund sold 120,000 shares and private equity fund CDH sold 100,000 shares. The latter two both held 3.9% of the company before the placement, which has now been reduced to 2.7% and 2.5% respectively. The chairman's 32.7% stake will be reduced to about 21%.

The Shenhua Energy block, which was arranged by Citi, was much smaller at HK$682 million ($87 million). The undisclosed seller offered 20 million shares at a price between HK$34.10 and HK$34.50, which represented a discount of only 1.4% to 2.6% versus yesterday's close of HK$35. Given the tight range it was no surprise that the deal priced at the bottom for a 2.6% discount, especially since it wasn't launched until almost 6pm Hong Kong time and closed by 7.30pm. A source said the bookrunner likely wanted to seal the deal quickly given that there were two other Hong Kong placements in the market at the same time. The entire deal was bought by about 20 investors, but was said to have been multiple times covered.

The discount was the tightest for a Hong Kong placement this year, not counting the small $40 million sell-down in Wharf by an institutional shareholder in early April which was done at a fixed 1.6% discount. However, while the Shenhua offering was twice that size in dollar terms, it accounted for only 0.6% of its share capital and 1.6 days worth of trading volumes. This would have helped in terms of gaining acceptance among investors for the tight discount. As one observer put it, even if all the investors who bought the placement were to turn around and sell today, it wouldn't have much impact on the share price.

Even so, the tight discount in combination with yesterday's 2.8% gain in Shenhua's share price meant that the placement price of HK$34.10 ended up slightly above Wednesday's close of HK$34.05, which must be regarded as a good outcome for the seller. The stock is still trading 39% below the October high of HK$57.85, however.

Analysts aren't quite as unified in their assessment of this stock as with Belle, but the 25 "buy" recommendations still outnumber by far the five "holds" and three "sells". The average target price is HK$47.94, suggesting a 37% upside from current levels.

Aside from these two deals, Yip's Chemical Holdings was also in the market last night aiming to raise up to HK$282.50 ($36 million) from a top-up placement. According to the term sheet, the company was to use Rmb60 million ($8.6 million) of the proceeds to build an ethyl acetate manufacturing facility at one of its plants, while the rest would go towards future acquisitions and working capital.

The deal, which was arranged by Macquarie Capital Securities, comprised 50 million shares that were offered at a price between HK$5.50 and HK$5.65, equal to a discount of 4.2% to 6.8% versus yesterday's close of HK$5.90.

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