The deal was expected by the market since the company was approaching its annual general meeting (on June 12) when its existing mandate to issue new shares corresponding to up to 20% of its outstanding H-shares share capital was due to expire. However, the fact that it came on a Friday û when there are typically fewer potential buyers around û did raise some eyebrows, especially since the company hasnÆt exactly been a market favourite this year and investors know that there are more capital raisings to come. It was also quite a sizeable transaction at about 20% of the existing H-share capital, 7.7% of the company as a whole and more than 27 days worth of trading volume.
But thanks to an anchor investor who bought a large portion of the deal, the airport operator was able to fix the price close to the mid-point of the offering range for a 6.9% discount. The identity of the anchor investor wasnÆt disclosed to the other buyers, except for the fact that it was an institutional investor and that it was new to the company. However, it is likely to become public in a few days since sources said it bought more than a quarter of the deal and therefore will end up holding more than 5% of the H-share capital û the level which requires public disclosure through a stock exchange filing.
One source says the anchor was the price driver in this transaction and prompted other investors to adjust up their initial price limits. The shares were offered between HK$7.32 and HK$7.68, which corresponded to a discount of 4% to 8.5% versus FridayÆs closing price of HK$8. The final price was set at HK$7.45.
The UBS-led offering comprised a total of 313.214 million shares, of which 90.9% where new. The remaining 9.1% were sold by ChinaÆs National Social Security Fund after the shares were first transferred to the fund from Beijing AirportÆs controlling shareholder. This is in line with the usual practice on primary H-share offerings and is to ensure that 10% of any new capital raised by state-owned companies goes to the fund.
Aside from the anchor investor, the deal attracted about 30 other orders and was covered quickly. However, the book was kept open for close to four hours as the bookrunner tried to push up the price. In the end it was ôwell coveredö. The final list of buyers included several existing investors. Part of the reason why this deal worked so well, though, was that Beijing Capital Airport is one of the top 20 most shorted stocks in Hong Kong with about $150 million worth of short positions outstanding. This created a ônaturalö demand by hedge funds in particular.
Of course, with the anchor investor taking such a big portion of the deal, many other investors werenÆt able to get as much stock as they wanted, which could potentially result in a bit of a short squeeze. Adding to that possibility is the fact that the placement shares cannot be sold until June 10 when the deal settles.
ôThere will be no immediate selling pressure so the stock should trade quite well,ö says the source.
Many of the shorts had been put on at the HK$8 to HK$8.50 level where the stock has been hovering since the end of April after bouncing from about HK$6 in the middle of that month and were likely driven by the belief that a primary share sale was drawing closer. Based on the outcome of other deals of similar size this year, most people who had gone short probably thought the discount was going to be a bit wider though. And without the anchor investor it most likely would have been.
The fact that the bookrunner pre-sounded the market for sizeable interest before the launch shows that investor demand is not something that can be taken for granted these days. Investors have been particularly sceptical about Beijing Capital Airport because of the increase in the acquisition price for terminal three. The company said in late January that the total acquisition cost (to be paid in instalments) is now expected to be Rmb26.9 billion ($3.9 billion), which is 22% higher than the previous estimate of Rmb22 billion.
In addition to that, the traffic flow at Beijing airport dropped in the first three months this year, partly due to soaring fuel costs and partly because the Chinese regulators instructed the domestic airlines to cut the number of flights to BeijingÆs overcrowded airport between August 2007 and March this year to minimise flight delays and maintain airport safety. The existing two terminals at the airport have been overloaded since 2005 and before the new terminal opened they were operating at 50% above the original design capacity, according to analysts.
The long-term macro backdrop remains favourable as the Chinese population is getting wealthier and the upcoming Olympics is expected to boost passenger and aircraft movements in and out of Beijing by about 20% in connection with the games. Analysts at Citi expect Beijing to become AsiaÆs busiest passenger airport by 2009 and the busiest in the world by 2010. In 2006 it handled 41 million passengers and was ninth in the global rankings after overtaking six other airports that year, including Hong Kong.
April traffic data, published on Friday, showed a modest 1.1% increase in the number of aircraft passing through the airport, suggesting the new terminal, which began operating on a trial basis in March, may be making a difference already.
However, analysts argue that the cost overruns for the massive terminal acquisition will drag down the companyÆs earnings from this year onwards. Says Richard Lee at Core Pacific-Yamaichi in a research note dated early April: ôWe project that both depreciation cost and interest cost will surge in the next two years, which will depress earnings despite the companyÆs plans for an A-share listing to raise part of the funds it needs.ö As a result, he adds, ôshareholders are not in a position to reap gains from the Olympic trafficö.
Lee has a sell recommendation on the stock, as do nine of the other 12 analysts who cover the company, according to Bloomberg. Despite the slight rebound since late April, the stock is down 40% so far this year and has fallen 53% from a high of HK$16.90 in early October.
The parent company, which owns 56.6% of the listed unit following this placement, will be prevented from selling any more H-shares for the next three months. The lock-up doesnÆt apply to a potential A-share offering, but this too is unlikely to come until close to the end of the year at the earliest.
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