The price declined after the company gave what was interpreted as negative guidance on its gross margins for the first half in its 2005 results announcement. But according to people familiar with the offering, the investors had decided to sell even before the announcement - since their six-month post-listing lock-up expired on April 14.
ôPrivate equity has a track record of making good investments but to sell as quickly as they can,ö one observer said, noting that even with yesterdayÆs sharp drop, the share price is up 52.2% compared with the IPO price.
The placement comprised a total of 369.2 million secondary shares, or about 17% of the issued share capital, which were offered to the market at a price between HK$3.225 and HK$3.275. The range represented a discount of 4.4% to 5.8% over MondayÆs (April 24) closing price of HK$3.425 and a much greater discount of up to 25% versus FridayÆs record high close of HK$4.30.
However, investors were clearly intimidated by the 20% reduction in market cap in single day and the interest for the shares was fairly modest, resulting in the price being fixed at the bottom of the range. It didnÆt help that both Morgan Stanley and Goldman Sachs yesterday lowered their recommendations on the stock to hold from buy, even though both banks based their decisions on the much higher share price at the end of last week.
Morgan Stanley, which also took the company public in October last year together with Cazenove, was sole bookrunner for the placement.
Despite the concerns, the share sale was completed in about three hours and was fully subscribed by a fairly even mix of institutional investors, hedge funds and private high-net worth individuals û primarily from Asia and Europe, according to a source familiar with the offer.
The largest seller among the group was Morgan Stanley Private Equity, which was said to have sold 224 million shares to reduce its stake to just below 10% from 20.7%. Private equity house CDH, a Mr Wang who received shares in China Paradise when it bought his company, and a group of management shareholders also sold smaller amounts of shares.
None of them cashed out completely, however, and the management shareholders will still control 50.1% of the company.
One observer said yesterdayÆs sharp sell-down of the stock failed to take into account that China Paradise is a consolidation story with two of its competitors about to be bought up. China Paradise itself last week paid Rmb150 million ($18.7 million) for the rights to buy BeijingÆs largest home appliance chain should the owner decide to sell within a year.
By acquiring the 60-store chain that is owned by Beijing Dazhong Electric Appliance, China Paradise will eliminate yet another competitor which will be positive for the price dynamics in the industry and help to reduce the downward pressure on margins.
In a brief research note, Morgan Stanley noted that the proposed deal would give China Paradise a leading position in more key markets in China than any other company and would make it ôa unique consumer company with leading positions in both Beijing and Shanghai.ö
However, ôthe faster-than-expected cost ramp-up and the lofty valuation suggest that
we should wait for better entry levels,ö the bank said as it downgraded the stock but kept the target price unchanged at HK$3.95.
In its earnings release issued over the weekend, China Paradise noted that ôthe entire industry faces severe pressure on profit growth in the short termö and added that due to a delay of confirmation on rebates and sponsorship fees from suppliers its profit in the first half of 2006 ômay be lower than that of last year.ö
The company plans to open about 90 new stores this year, including 10 mega stores that will be opened for brand building purposes. At the end of 2005 it had 193 stores spread through 72 cities.
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