US private equity firm Carlyle offloaded its entire stake in Haier Electronics Group, cashing in on a near four-year investment in the Chinese home appliances company.
Since the US private equity firm made the investment in August 2011, Haier shares have gained more than 160%.
Carlyle took advantage of a 26% 11-day jump in Haier’s shares to launch the block, as investors continued to flood the Hong Kong market following the announcement last week by mainland regulators that Chinese mutual funds will be allowed to participate in the Shanghai-Hong Kong Stock Connect programme.
The share sale launched Wednesday evening in Hong Kong under the sole lead of UBS, with Carlyle looking to offload 140 million shares at an indicative price range between HK$23.50 and HK$24.25 each, or a 3.8% to 6.7% discount to the April 15 closing price of HK$25.20, according to a term sheet seen by FinanceAsia.
Shares priced at the bottom of the range Thursday morning at HK$23.50 per unit, a wide 6.7% discount to the April 15 closing price, a source close to the deal told FinanceAsia. Carlyle raised $424.5 million from the share sale.
Carlyle first invested in Haier Electronics in August 2011 after paying $137 million for its convertible bonds, giving the private equity investor a 9% stake in the Chinese washing machine and water-heater manufacturer. The investment gave Carlyle the right to nominate one director to Haier’s board, then nine-strong.
Since then the shares have skyrocketed by 166%, rising from HK$9.49 on August 1, 2011 to HK$25.20 on April 15.
This year alone, from March 27 to April 15, Haier’s shares have put on 26%, making it an opportune time for Carlyle to exit the investment.
Like the sizzling Hang Seng index, Haier’s shares have paused for breath in the last two trading sessions, pulling back slightly. So for investors expecting the recent rally in equity markets to continue, the block sale provided an opportune entry point, although the recent run-up may have encouraged investors to push for the shares to price at the low-end.
Not cheap
Haier is not as cheap as some of its comparables — it is currently trading at 19.02 times its expected 2015 earnings, much higher than peer GOME Electrical Appliances’s earnings multiple of 10.8. Haier is also trading on a higher valuation than its four-year historical average from 2010-2014 of 12.6 times.
Although China Merchants Securities cut its earnings forecast for 2014-2016 by 3%-5%, the brokerage maintains that the home appliance company will experience long-term margin improvements as it boosts investments in its logistics business.
Logistics sales accounted for 6% of the company’s total integrated channel service business in 2014, according to China Merchants research, which forecasts that logistics sales will grow at a compound annual growth rate of 30% in 2014-2016. Mergers and acquisitions are also on Haier’s horizon, the research noted.
“To achieve better economies of scale, Haier will continue to look for M&A opportunities in logistics areas after its acquisition of Shanghai Bayer, a furniture logistics company,” the January 29 research note said.
Haier reported revenues of Rmb67.1 million ($10.8 million) in 2014, an 8% increase over Rmb62.3 million in 2013. Net profiles, meanwhile, totaled Rmb2.5 million last year, compared with $2.1 million in 2013.
A flurry of activity
The Haier block trade comes amid of flurry of offerings in the Hong Kong market after the Hang Seng index scaled a seven-year high.
A block in Luye Pharma Group worth up to $77 million also launched on Wednesday, with some 55.8 million shares — all secondary — on offer between HK$10.45 to HK$10.66 per unit, representing a 4% to 2% discount to the April 15 close of HK$10.88, according to a term sheet seen by FinanceAsia.
Morgan Stanley was the sole bookrunner.
It was the third deal for Morgan Stanley in as many days, with the US investment bank launching a $50 million accelerated placement in Lee’s Pharmaceutical Holding on Tuesday and a $106 million block in Cosmo Lady, the Chinese lingerie company, on Monday.
Goldman Sachs oversaw a $25 million share sale in Shanghai Pharmaceuticals Holding on Tuesday, while Credit Suisse led a 85 million-share sale in New China Life that netted Singaporean life insurer Great Easter Holdings some $555 million on Monday.
UBS was also busy at the start of the week, securing $245 million after selling 490 million shares in China Cinda Asset Management and overseeing a share sale in Far East Horizon that netted Singapore sovereign wealth fund GIC $65 million.
The Hang Seng Index has rallied hard since the Easter break as Chinese investors have piled into Hong Kong to purchase H-shares, which are currently cheaper than A-shares.
A-shares are currently trading at a 90% premium to H-shares. Mainland Chinese investors coming into Hong Kong in droves have boosted turnover in Hong Kong from $10 billion a day to between $30 to $35 billion a day, according to one US investment bank.
In relative terms, shares in Hong Kong still look fairly cheap — the Hang Seng Index is currently trading at 11.62 times 2015 earnings. This compares with the Shanghai Stock Exchange Composite Index, which is currently trading at 20.11 times its earnings.
This article has been corrected to clarify the 166% rise in the share price rise since Carlyle first invested, rather than how much Carlyle made.
