Chaoda raises $51 million from placement

Chaoda Modern Agriculture has raised HK$402 million ($51 million) from a placement of new shares, becoming only the second Hong Kong-listed company to raise fresh capital through a follow-on equity sale this year.

While quite small in absolute terms, the UBS-led placement represented about 10 days worth of trading volume, which is not insignificant in a market where investors continue to favour liquid stocks, mindful that they need to be able to get out should the market suddenly take a turn for the worse. The fact that the Chaoda placement was multiple times covered is therefore quite encouraging and suggests that investors can be convinced to look at stocks outside the major blue-chips.

However, they will require a decent discount to do so, as indicated by the fact that the price was fixed towards the low end of the offering range.

The China-based company, which grows fruits, vegetables and crops, breeds livestock and operates a supermarket chain, offered 80.4 million new shares, or about 3.2% of its existing share capital, at a price between HK$4.94 and HK$5.17. This implied a discount of 8% to 12.1% versus yesterday's closing price of HK$5.62.

After a few hours of bookbuilding following the end of Hong Kong trading, the price was fixed at HK$5 for an 11% discount. According to a source, the deal was covered by the time Asian investors called it a day, but was kept open and attracted good interest from the US as well. The final order book contained about 40 names, including a few existing shareholders.

The discount was a bit wider than the 9.5% achieved by China National Building Material on its $300 million follow-on H-share offering two weeks ago. The CNBM transaction was six times larger in dollar terms, accounted for 13% of the existing share capital and 33% of the free float. The producer of various building materials, including cement, priced its Morgan Stanley-led offering at the top of the range after offering the shares at a discount of between 9.5% and 14.1% to the latest close.

Like many other companies these days, Chaoda was raising money to shore up its capital base. The company has an outstanding $173 million convertible bond that will become puttable in May and since the bond is out of the money -- although not significantly -- it is likely that at least some of the bondholders will choose to cash in.

Moody's Investors Service noted in December that Chaoda's entire $225 million of foreign currency debt, including the puttable CB, will come due over the coming 15 months, requiring two bullet repayments totalling Rmb2.9 billion. In light of this significant debt servicing obligation, and taking into account that the company is still maintaining its aggressive capex plan of Rmb2.5 billion-Rmb2.8 billion per year, the ratings agency changed the outlook for Chaoda's Ba2 foreign currency rating to negative from stable.

Chaoda's share price has been edging gradually higher in recent months and is currently trading 91% above the low of HK$2.94 from October last year. However, it is still well below the 2008 high of HK$11.44 that it hit in early May.

The stock isn't covered by any of the major investment banks, but of the eight brokerages that follow the stock (including BNP Paribas and Macquarie), seven have a "buy" recommendation on it. This compares with only one "sell" and no "holds".