New records were set yesterday (Tuesday) by an increased 550 million share placement for China's largest alumina and aluminium producer, Chalco. The $400 million transaction represents the largest ever H share placement, beating the previous record holder, Huaneng Power by some margin. Indeed, there have only ever been two placements above $100 million before - a $142 million issue for Huaneng Power in February 1998 and a $134 million issue for Shanghai Petrochemical in August 1996.
For CLSA, which also led the Huaneng Power deal, the mandate must have been particularly satisfying since it marks the investment bank's largest transaction to date.
Timing of the deal could have hardly been better and books were covered within only 25 minutes of launch. This contrasts to the fate of a prospective placement in mid-December, which had to be pulled after news leaked out to the market and the stock price corrected from HK$5.50 to HK$5. Since then it has recovered, hitting a new high of HK$6.20 in late December and HK$6.15 as of yesterday.
Chalco's offering undoubtedly benefited from being the first Asian equity transaction of 2004 - ahead of what could turn into a massive crush. Institutional investors that had closed their books in mid-December are now back from the Christmas break with cash to invest. In the interim period, aluminium prices have continued to rise, as have stock prices in a sector anticipating good results from global leader Alcoa on Thursday.
Against this backdrop, CLSA initially decided to syndicate the deal on a first come first served basis, but changed its mind within a few minutes after orders of up to $120 million started flooding in. The deal was then completed on a bookbuilt basis, with the Asian book closing two times covered and global book four times covered.
The deal was marketed on a fixed discount of 8% to the stock's spot close. A total of 165 investors are said to have participated, with a geographical breakdown that saw 80% of the Reg S deal placed in Asia, 20% in Europe and 20% to offshore US investors. Virtually the entire book was institutional rather than retail money.
One thing in the deal's favour was its size, which is not large relative to either Chalco's issued share capital or trading volume. Having been upsized from 450 million to 550 million new shares, the final offering represents 5% of the company's entire share capital and 20% of its H share capital (effectively the freefloat).
Strategic investor Alcoa, which has owned 8% since Chalco's IPO in December 2001, also subscribed to an equal number of new shares to maintain its stake at the same level. In terms of trading volume, the transaction equates to about 17 days trading.
Towards the end of 2003 placements tended to struggle if investors thought companies were cashing in at the top of the market and didn't have a defined use of proceeds. Chalco is also trading on a historically high valuation, but many analysts believe it could continue to be supported by strong alumina prices. Having initially believed that 2003 would be the peak after spot prices doubled, a number now argue that prices could continue to rise through 2004 and even into 2005.
China's growth story has propelled Chalco to about 18 times 2004 earnings compared to nine time earnings when the company listed in 2001. It now trades flat to the global average, but is still at a slight discount to Alcoa, which trades around the 23 times level.
The company is China's only producer of alumina, accounting for 60% of a market that still relies on imports. It also has a dominant 17% market share of aluminium from which alumina is smelted. Analysts say asset growth continues to be underpinned by the company's acquisitive tendencies towards the country's many small smelters.
An equity issue also makes sense given that gearing of 38% remains relatively high.
Proceeds are being used to buy new smelters and increase production at the company's Shanxi alumina refinery from 1.2 million to two million tones per year.
