State-owned investment fund Haixia Capital sold its entire stake in Haitong Securities after Tuesday's close, booking a loss of $329.52 million.
Many will be wondering why the group decided to sell the shares at a time when the Chinese stock markets continue to melt down, Greece edges towards a Eurozone exit and on a day when Haitong itself fell 13.23%.
Does Haixia think the stock price of China's second largest brokerage has much further to fall? Or was it more a case of needing the money to cover other positions?
Either way, the group failed to re-coup its original investment after selling 569.427 million shares at HK$11.12 each, a 20% discount to Haitong's HK$13.90 close on Tuesday, or an even more staggering 33.23% discount to its close on Monday.
This raised HK$6.331 billion ($816.48 million), 28.9% less than the HK$8.894 billion ($1.146 billion) Haixia paid in late December. The group was one of seven investors who acquired shares through a HK$29.9 billion private placement that was priced at HK$15.62 per share.
The deal represents 16.69% of Haitong's H shares but, given the stock's high liquidity, only equates to 11.82 days trading volume. Short selling turnover on Tuesday amounted to $26.82 million, a ratio of 10.822% or 1.376% of the market's overall short selling value.
Lead manager UBS initially marketed the new deal on a range of HK$11.12 to HK12 per share, which equated to a 13.7% to 20% discount to the close. Books were open for about three hours and were said to be well covered with the top five accounts receiving 60% of the deal.
What was most noticeable was the absence of Chinese investors, the key prop to most China-related equity offerings. While they were busy being de-leveraged, international investors stepped in to take their place.
Sources close to the deal reported a mix of hedge and long-only funds, most of which were from Asia with some participation from Europe and the US.
Some might say they picked up a bargain notwithstanding the fact that many analysts are likely to downgrade their forward earnings forecasts for the Chinese brokerage sector following the recent A-share meltdown.
Based on current consensus forecasts, Haitong Securities closed Tuesday at 7.46 times 2016 earnings, a historic low. Investors who participated in the new deal picked it up for 5.97 times 2016 earnings.
According to Galaxy Securities, Haitong is now trading on a 2015 price-to-book multiple of 1.25 times, back to where it was three years ago before the Chinese stock markets began to rally.
The company originally listed on the Hong Kong Stock Exchange in April 2010 at HK$10.60 per share. Year-to-date it is down 28.8% and 44.9% over a one-month period.
In a research report published on July 2, before the most recent big correction, Credit Suisse said it was starting to offer a buying opportunity again. "We see the current market correction as starting to show value in China brokers with H shares now trading at 10 to 15 times 2016 p/e's," it wrote.
Placement vendor Haixia Capital was established by SDIC Capital, Fujian Investment & Development Group and Fubon Xingji Investment.
