Chinese small-cap raises $100 million in CB market

Deeming from the deal flow, the convertible bond market in Asia is definitely open for business again — and not just for high-profile names. Last night, Hong Kong-listed Chaowei Power Holdings, a small-cap Chinese company that makes batteries for electric bicycles, was able to raise Rmb663 million ($100 million) from a renminbi-denominated, but US dollar-settled, CB that saw decent demand primarily from outright investors.

To make sure the deal did get enough traction, bookrunner Goldman Sachs had drummed up anchor demand for about two-thirds of the deal before launch, and while the final demand wasn’t overwhelming, it was sufficient to comfortably cover the deal. The Rmb158 million ($25 million) upsize option wasn’t exercised, although the bookrunner has 30 more days to do so.

According to a source, about 30 accounts participated in the transaction and some investors put in orders for 10% to 15% of the deal, which is pretty decent for a fairly illiquid small-cap with very limited stock borrow.

The source said that whatever borrow there may be is expensive, which means hedge funds wouldn’t be able to short the stock in an efficient way. It was no surprise therefore that many of the usual CB hedge funds did not participate in this deal. About 75% of the offering was allocated to outright investors, some of which were said to have been interested because of the fairly high coupon.

The CB has a five-year maturity, but can be put back to the issuer after three years at par. There is also an issuer call after three years, subject to a hurdle of 130%. It was offered with a coupon and yield of 6.25% to 7.25% and a conversion premium of 20% to 25% over yesterday’s close of HK$4.33. They were both fixed at the investor friendly end for a 7.25% coupon and a 20% premium, which gave a conversion price of HK$5.20.

Chaowei’s share price fell about 27% from its previous high in March to a low of HK$3.28 in early May, but has since recovered all of that ground and is currently trading about 100% above its IPO price of HK$2.18. The share price hit a record high of HK$4.70 on August 22, which at first glance makes the conversion price seem a bit steep.

However, the company is the leading player in a growing market, with a market share of about 25%, and analysts are overwhelmingly positive on the stock. Of the 11 analysts who cover the company, according to Bloomberg, 10 have a buy recommendation on the stock and the average 12-month target price is HK$5.83.

Chaowei listed in Hong Kong in July 2010 after raising about $72 million from an initial public offering. In the first six months this year, it recorded more than 100% growth year-on-year in sales volume, revenue and net profit.

The CB was marketed at a credit spread of 750bp, which was based on the 10% coupon that investors were seeking when the company was trying to issue a dim sum bond in March this year. The company supposedly felt that this was too expensive and walked away from the deal, but since then credit spreads have tightened, which allowed the company to reduce the credit cost somewhat. Of course, the equity option on the CB also helps to tighten the credit spread.

Based on the final terms, a stock-borrow cost of 5% and full compensation for all cash dividends, the bond floor worked out at 93.4%. Due to the limited liquidity in the stock, the CB wasn’t marketed as an implied volatility play, but as a reference, the implied volatility was said to be somewhere in the mid-teens.

Some sources said the CB was indicated just below par in the grey market, although others said it was trading right at par. However, the grey market activity was thin during the five-hour bookbuilding, which is no surprise given the limited interest from hedge funds.

Chaowei said it will use the proceeds from the CB to fund an expansion of its production capacity, including the earlier announced construction and installation of additional production facilities in Zhejiang, Jiangxi and Hebei provinces. Some of the money may also go towards the upgrade of existing production facilities, debt repayments, selective acquisitions and other general corporate purposes.

The company is in the process of upgrading its production capacity to about 90 million to 100 million units by the end of this year, from 75 million units at the end of June, with additional capacity to follow next year.

In 2011, China had about 130 million electric bikes, and, according to Chaowei, the number is expected to grow to 200 million by 2015. This will not only lead to greater sales to bike manufacturers, but should also result in a significant boost to the company’s sale of replacement batteries for existing bikes.