The strong momentum in the secondary market no doubt played a role in the timing of both deals, but the outcome ended up being quite different largely because of how these two stocks have performed so far this year. It was a clear sign that investors are still price sensitive when it comes to follow-on issues and block trades.
Shun Tak Holdings, which raised HK$1.72 billion ($220 million) with the help of CLSA, attracted about four times as much demand as it needed to get the deal done and was able to exercise the upsize option and to price inside the wide end of the discount range at HK$12.25. Based on TuesdayÆs closing price of HK$12.78, the shares were sold at a 4.1% discount, but since the stock was to start trading without the right to a seven HK cent dividend yesterday, the actual discount to the adjusted close was an even tighter 3.6%.
This compared with an offering range of 3% to 6% and was the tightest discount on a Hong Kong placement by far since the secondary market started to recover from the August correction. In fact, you have to go back to July 24 to find a deal that was priced at a narrower gap to the prevailing market price. That deal, a $168 million Citi-led placement for property developer Shenzhen Investment, was priced at a 3.5% discount to the most recent close.
Underpinning the demand was the fact that Shun Tak - a Macau-focused property and transport conglomerate - has been a laggard in terms of stock performance this year, gaining only 6.8% compared with a 35% rise in the Hang Seng Index. However, investors are beginning to realise its potential as a solid play on MacauÆs economic growth and since its most recent low on August 17, the stock is up 32%.
In a research note issued just over a week ago, JPMorgan noted that the successful launch of the Venetian casino has validated the long-term growth prospect of Macau and has demonstrated that the former Portuguese colony has a ôlegitimate chance to transform into a world-class tourist destination and a convention and exhibition hub in the regionö.
ôWith outstanding assets in property, transportation and gaming, Shun Tak should be able to take advantage of this promising growth opportunity,ö analyst Billy Ng said in the note.
Xinyi Glass Holdings came to market against an entirely different backdrop with a share price that has more than quadrupled in the past 12 months. In addition to that, the stock also shot up 10.3% in morning trading yesterday before the stock was suspended for the placement. Consequently, the offered discount range of 4.6% to 9% versus the latest traded price of HK$11.34 may not have looked all that appealing to investors who were a bit late out of bed.
And not surprisingly, the offer was priced at the bottom of the offering range for the maximum discount. There was no mentioning last night of how much demand the deal had actually garnered, but the upsize option of 25 million shares wasnÆt exercised. This meant the total deal stopped at 175 million shares, or 10% of the company, and raised HK$1.8 billion ($231 million) û the minimum amount sought. Citi, Credit Suisse and Morgan Stanley acted as joint bookrunners.
The final price of HK$10.32 did, however, represent a modest premium to TuesdayÆs close of HK$10.28, which by itself suggests there is still strong confidence in the stock. (The Hong Kong stock market was closed for a holiday on Wednesday).
Indeed, analysts argue that the placement price was reasonable even with the recent run-up in the stock.
ôThe latest closing price reflects the value of the company, and everybody is optimistic about its future growth,ö says one of the analysts of Xinyi Glass. ôThere is some concern that the shareholders are selling shares, but itÆs going to affect the share price merely in the short-term. In the long run, the growth potential of the company is huge.ö
The analyst was referring to the fact that this was only a partial top-up placement. Of the 175 million secondary shares on offer, 128.4 million were matched by the issuance of new shares to the selling shareholders, but the remaining 46.6 million were sold on an outright basis by a group of eight or nine existing stock holders.
Still, the placement will see the company raise approximately $170 million before expenses, which will be used to expand its production capacity. The company said 50% of the net proceeds will to towards the expansion of its upstream float glass production û a business that began commercial operations only in 2006. Another 25% will fund its construction and auto glass facilities, while the rest will be set aside for general working capital.
According to the companyÆs interim report, it will build a new high quality float glass production line with a daily melting capacity of 900 tonnes in the second half of 2007, adding to its current 1,700 tonne capacity for this type of glass. It will also add a new production line for photovoltaic glass (used for solar power systems) with a daily melting capacity of 300 tonnes.
Xinyi Glass is the largest exporter of auto glass products from China and has a 15% share of the US auto market. In the first half of the year, its net profit more than doubled to HK$300.1 million ($38.6 million) from the same period 2006. This was achieved while revenues grew 70% to HK1.22 billion.
Shun Tak was less specific on the use of its proceeds, saying only that they will help fund business opportunities in MacauÆs property market. Observers say the company, which is founded and still chaired by MacauÆs number one gaming tycoon Stanley Ho, offers a diversified way to play the Macau growth theme û the economy grew a massive 31% in the second quarter year-on-year - without having to take a bet on which casino will outperform in this increasingly competitive market.
Among its core businesses is the TurboJet express ferry, which services Hong Kong, Macau and Shenzhen, but most analysts argue that it is Shun TakÆs property portfolio that offers the biggest growth prospects. According to the JPMorgan report, recent transactions suggest that luxury property prices have gone up more than 10% since the opening of the Venetian on August 28.
Shun Tak offered 140 million shares, including the 20 million share upsize option, at a price between HK$12.01 and HK$12.40. The shares were all matched by issuance of new shares, meaning all the proceeds went to the company. The total deal size accounted for about 5.5% of the enlarged share capital.
According to sources, the order book included about 75 names when it closed at around 10pm Hong Kong time. Asian investors had only until 3pm to decide whether to participate, however.
Xinyi Glass, which offered its shares between HK$10.32 and HK$10.82, attracted about 60 investors. The books were open from 3pm to 9pm Hong Kong time, but while this would have given onshore US investors a chance to come in, sources say only a couple did and the final book was predominantly Asian. One source noted that the total demand was well in excess of the final deal size, and the decision not to exercise the upsize option was made to maintain the quality of the book.
ôNone of the recent follow-ons has traded particularly well the next day and the parties involved would wanted to make sure they got the allocations right,ö the source said.
Another reason why the upsize option wasnÆt exercised may have to do with the fact that it was made up of secondary shares only. It is possible that the sellers decided to hold on to their stock when the price was fixed at the bottom.
The lowest discount on a post-correction placement in Hong Kong before the Shun Tak deal was 5%. This was achieved on the sale of $80 million worth of secondary shares in Lee & Man Paper Manufacturing on September 7 and by Kerry Properties on its $533 million top-up placement last week. Both these deals were arranged by Citi.
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