Chinese private equity firm CDH Investments raised HK$7 billion ($900 million) by selling about one-third of its stake in WH Group through an overnight block trade on Wednesday, taking advantage of the stock’s rally since its full-year results in late March.
Market participants familiar with the Chinese pork producer should not be surprised by CDH’s decision. In fact, the private equity firm was one of WH Group’s pre-IPO investors that intended to sell its shares in the company’s failed attempt to list in April 2014.
CDH and other pre-IPO investors – Goldman Sachs, Temasek and New Horizons – were forced to abandon the secondary share sale when WH Group made its second, successful, listing attempt in October.
What may have surprised market participants was CDH’s decision to launch the share sale when Hong Kong’s Hang Seng Index recorded its biggest decline in three weeks, sliding 0.8% on Wednesday after hitting a nine-month high last week.
However, WH Group has been unaffected by the broader market decline, edging up 1.5% to close at a 22-month high at HK$6.26 on Wednesday. The stock has risen for three consecutive days since WH Group announced stellar interim results on Sunday, with net profit rising 82% year-on-year to $551 million in the first six months of the year.
The decision to sell on Wednesday could also help CDH avoid potential market volatility going into next week. Janet Yellen, Federal Reserve chair, is due to deliver a speech at an annual conference of central bankers in Jackson Hole on Friday, which may provide some guidance as to whether the US will hike interest rates this year.
Dual-tranche placement
CDH offered 1.17 billion shares, which accounted for 8% of WH Group’s existing share capital, in a two-tranche placement that included 880 million shares for institutional subscription and 292 million shares pre-subscribed by the company’s senior management before deal launch.
The deal was marketed at an indicative range of HK$5.9 to HK$6.05 per share, which translated to a discount of 3.4% to 5.8% to the stock’s HK$6.26 Wednesday close.
Commitment by WH Group’s senior management, including chairman Wan Long, has sent a positive signal to the market that allowed sole bookrunner Morgan Stanley to cover the institutional portion within 30 minutes after deal launch late on Wednesday, according to a source familiar with the situation.
Investors showed price sensitivity throughout the bookbuild but the company was able to price off the bottom of the range at HK$5.95 per share, after a lengthy discussion with the company's management that dragged on till midnight in Asia, according to the source. The final discount was 4.95%.
Morgan Stanley, which was one of the joint sponsors of WH Group's $2 billion IPO two years ago, was able to pull together a final book that was multiple times subscribed despite not having conducted any pre-sounding before launch.
According to the source, the shares were predominantly subscribed by long-only funds. There was also significant hedge fund participation as they bought shares to cover the large short position in the market.
CDH should be pleased by the outcome, having sold WH Group shares at the highest price since its one-year IPO lockup expired in August last year.
After the sale, CDH’s shareholding in WH Group has reduced to 19.77% from 30.39%. It is subject to a six-month lockup following Wednesday's share sale.
The deal is the second largest block trade in Asia ex-Japan so far this year behind AIG’s $1.25 billion selldown of PICC P&C shares.
What next?
Market participants will be keen to see whether CDH has made its move too early since the company’s current share price has not fully priced in its strong first-half results. The stock had traded at 14.2 times historical earnings but the multiple was revised to around 11 times based on the latest results, indicating there is considerable room for the shares to advance further.
However, WH Group management has indicated the company could face profit margin pressure as China’s pork price is expected to fall to Rmb16 per kilogram by the end of the year, representing a decline of 13.5% from the current market price of Rmb18.5/kg. Onshore prices have already fallen 12% from a peak of Rmb21 at the beginning of the year.
In face of deflating prices, Chairman Wan Long said the company would increase pork imports from the US to reduce manufacturing costs.
WH Group, which sells products under its Shuanghui brand, is the world’s largest pork producer after acquiring US pork producer Smithfield Foods in 2013.
