Two companies owned by the chairman and senior management of Hong Kong-listed Shenzhou International Group last night took some money off the table by selling HK$793 million ($102 million) worth of shares in the company, which manufactures fabrics and knitwear for brands like Uniqlo, Adidas and Nike.
While small, the sell-down attracted strong interest among long-only investors and was upsized by 20%. Despite that, the price was also fixed at the mid-point of the range. Typically, when a deal is upsized, the price tends to end up at the low end to compensate for the larger number of shares.
One reason for the demand is that the sale was viewed as a liquidity event. The free-float is close to 30%, but funds like the stock and have a tendency to hold on to it. As a result the turnover is currently only about $1.5 million per day. However, the bookrunner had also wall-crossed enough investors before launch to cover about 70% of the original deal size, which created good momentum. The deal was fully covered within one hour.
The sellers initially offered 40 million shares at a price between HK$16.34 and HK$16.70, which translated into a discount of 6% to 8% versus yesterday’s close of HK$17.76. But the strong demand, which came from additional long-only funds as well as some of the original anchor investors who chose to increase their order sizes, prompted the bookrunner to go back to the sellers and ask whether they might want to dispose of more shares.
The chairman eventually agreed to do so and the size was increased to 48 million shares, or 3.6% of the company. The deal was multiple times covered at the enlarged size as well even though the order books were closed after just two hours, one source noted.
The price was fixed at HK$16.52 for a 7% discount.
Thanks to the low liquidity in the stock, this wasn’t really a hedge fund play and most of the demand came from long-only investors, including big global funds. In all, more than 30 investors participated in the transaction, but according to the source the allocation was quite concentrated with 50% of the deal going to the top three accounts.
The sell-down came on the back of a 51% gain in the share price since late August and after the stock closed at a record high of HK$17.96 last Friday. Still, there appeared to be no concern about the fact that the company insiders were selling, perhaps because they were disposing of a relatively small part of their holdings.
Chairman Ma Jianrong, who owned about 58.4% before this sale through a company called Keep Glory, will still own 56.4%. Meanwhile, the group of executive directors, who jointly own stock through a company named Fairco Group, will see their holdings fall from 8.4% to 6.7%. After the upsize, Keep Glory sold 26 million shares, while Fairco sold 22 million shares.
Neither of the two companies has sold any shares since Shenzhou International listed in 2005 and they will now be locked up for six months.
However, the company raised $151 million from a top-up placement in April last year. That deal was priced at HK$13.80 per share, which translated into a 9.1% discount to the latest close. Credit Suisse was the sole bookrunner both for the top-up placement and for last night’s block trade.
International investors like Shenzhou International because of its solid track record and strong market position — it is one of the largest vertically-integrated knitwear original equipment (OEM) manufacturers in China and the number one supplier of such products to Uniqlo, Adidas and Nike. The company has also showed that it can successfully expand its customer base. At the time of its IPO it derived about 84% of its revenues from Uniqlo, but in 2011 the contribution from the Japanese brand had fallen to 24% with Adidas accounting for 22%, Nike for 19% and Puma for 9%. It also supplies other top brands such as Calvin Klein and Abercrombie & Fitch.
Ten of the 11 analysts who cover the company have a “buy” recommendation on the stock and the average 12-month target price is about HK$20.
Kim Eng initiated coverage of the stock yesterday with a target price of HK$23.60. In its initial report, the brokerage noted that Shenzhou International’s earnings have been rising steadily even during economic downturns thanks to its vertically-integrated business model and argued that it is well-placed for additional growth this year and next as new production capacity is coming on stream. The company’s export orders also picked up in the fourth quarter last year.
This was the third block in a Hong Kong-listed company this year after the $276 million sell-down in equipment leasing company Far East Horizon by its parent company, and Carlyle’s $796 million exit from China Pacific Insurance (CPIC) earlier in the week. And bankers say there is more to come as existing shareholders review their portfolios and take advantage of solid share price gains in the final months of 2012. The next few weeks, before companies and substantial shareholders enter the two-month blackout period ahead of the full-year earnings releases, are likely to be particularly busy.
