Two Asian mid-cap companies together with certain of their existing shareholders tapped the equity capital markets at the end of last week to raise a combined $442 million.
Both deals were done through the issuance of global depositary receipts (GDR) and, aside from adding to the companies’ coffers, they also helped to expand their international shareholder base.
The largest of the two was a $292 million deal in Hermes Microvision, a Taiwan-listed manufacturer of high-end testing equipment for the semiconductor and wafer industries, which hit the market after the close of trading last Thursday.
On the same night, Korea-listed Kolao Holding, the largest distributor of cars and motorcycles in Laos, and its chairman raised $150 million. Sources said the company will use its portion of the sale ($130 million) to repay debt and to expand its business both in Laos and into neighbouring Myanmar.
These were the first two GDRs to be issued by an Asian company since early July when Taiwan-listed Fubon Financial Holding kicked off the third quarter with an $850 million hard-underwritten deal. That transaction was believed to have been short on demand by the time the order books closed but after a little more than a week the share price had recovered to its pre-deal trading levels, limiting the negative fall-out both for the underwriters and the existing shareholders.
The only other sales of depositary receipts (DRs) by Asia-based companies in the third quarter happened in the US where ReneSola and JA Solar took advantage of the recovery in the solar power sector to issue $70 million and $96 million worth of new American depositary receipts (ADRs) with attached warrants respectively.
However, in a recent report summing up the DR activity in the third quarter, BNY Mellon noted that there were encouraging signs coming from China and Taiwan that suggested more DR issuance would be forthcoming.
“Taiwan’s tech-oriented market looks ripe for issuance from companies that want to raise capital for M&A, research and development and other expansion plans, while Chinese issuers are drawn to the deep capital pools in the United States,” Gregory Roath, head of BNY Mellon’s DR business in Asia-Pacific, commented in connection with the report.
The deal from Hermes Microvision last week definitely supports that view, as did the US IPOs from Chinese internet companies 58.com and Qunar at the end of October. As reported, the latter two drew strong demand from investors and posted sharp gains in the secondary market even after fixing the IPO price above the indicated range.
Hermes Microvision
The deal was backed by 50% new shares and 50% existing shares and followed a familiar pattern among Taiwanese companies in the sense that it approached foreign investors after being traded on Taiwan’s over-the-counter Gretai Securities Market for close to one-and-a-half years.
Taiwan IPOs, whether they take place in the Gretai market or on the Taiwan Stock Exchange main board, tend to be quite small and as a result they are primarily marketed to domestic investors. Most companies also wait 12-18 months after the IPO before following it up with a share sale in the international market. By then, the share price has usually gained quite a lot and the company has a decent market capitalisation, making it more attractive to foreign funds.
Hermes listed in May 2012, after raising about $41 million through an IPO. By the time it hit the market last week its share price was up 346% from the IPO price of NT$208 and its market cap was close to $2 billion.
The company and a number of local pre-IPO shareholders offered to sell a combined 10 million GDRs, accounting for about 15.2% of the existing share capital. Each GDR represents one ordinary share listed in Taipei. Goldman Sachs was the sole bookrunner.
The GDRs were offered at a price between $28.83 and $29.51 apiece, which translated into NT$850 to NT$870 per ordinary share and a discount of 6.1% to 8.3% versus last Thursday’s close of NT$927.
The deal came on the back of a management roadshow in early October, which gave international investors a chance to familiarise themselves with the company. Hermes chose not to launch the deal straight away, however, as it wanted to wait until after the release of its third quarter earnings on November 1.
The share price fell after the earnings report and by last Thursday it had lost 7.8% since hitting a record high of NT$1,005 on October 14. However, a number of investors were said to have approached Goldman Sachs (which also arranged the roadshow) about being able to buy shares in recent weeks and the deal was almost fully covered at launch on the back of those inquiries.
Together with additional demand that came in during the bookbuilding, the deal ended up about two times covered with orders from around 60 investors, one source said. The price was fixed at the mid-point of the range, at NT$860 ($29.17), resulting in a 7.2% discount versus the latest close and a total deal size of NT$8.6 billion ($292 million).
The company said it will use its share of the proceeds to pay for raw materials and to fund research and development projects.
The demand came mostly from Asia-based accounts, but included some global long-only funds as well. According to the source, at least half the deal went to long-only investors. The buyers included a mixture of existing and new investors, although Hermes did not have too many international shareholders before this deal as the stock has been fairly illiquid. Indeed, the GDR sale accounted more than 35 days of trading based on the average daily turnover.
The share price fell 4.3% after the transaction, but held well above the placement price throughout Friday’s session and the close of NT$887 means the stock is still up 70% so far this year.
Kolao Holdings
Like the Hermes deal, the Kolao transaction was well flagged as the company made a public filing on October 28, outlining the size and structure of the deal as well as the expected timing on November 7. The management also did a roadshow on Monday through Thursday last week, meeting with investors in Hong Kong and Singapore.
The Korean company, which was 51.4%-owned by chairman and CEO Sei Young Oh before this deal, already had a pretty decent following among international funds that like its exposure to frontier markets in Southeast Asia. But it was able to expand that quite significantly through this deal as the expected improvement in the liquidity prompted a number of new investors to buy in.
The deal was launched at a fixed size of about $150 million, with $130 million being raised by the company and the remaining $20 million coming from a sell-down by the chairman.
The GDRs were offered at a price between $13.42 and $13.71, which translated into W28,500 to W29,100 per ordinary share, or a discount of 3% to 5% versus Thursday’s closing price of W30,000.
The price was fixed at the bottom of the range for the maximum 5% discount, which was pretty tight given that the deal accounted for about 37 days of trading based on the average daily turnover. When the deal launched after the close of trading last Thursday, the stock was also up 67% year-to-date. It had come back about 11% from its most recent high of W33,750 in early October, however.
Based on the final price, the deal size worked out at about 11.18 million GDRs, of which 9.68 million were backed by new shares and 1.5 million by existing shares. Together they accounted for about 12.7% of the existing share capital. Each ordinary share is equal to two GDRs.
According to a source, this deal was also well-anchored before launch and ended up being well covered. About 40 investors participated in the transaction. The order book had an Asia-bias, which was no surprise given that the roadshow was focused on this region, but did include some notable long-only orders out of Europe, the source said.
The final demand was said to be pretty evenly balanced between long-only investors and hedge funds.
The stock held up well on Friday, falling only 3.3% to a close of W29,000. The deal was arranged by Deutsche Bank and Goldman Sachs.
Kolao was set up in 1997 and has a 33% share of the auto distribution market in Laos, focusing primarily on the sale of Hyundai and Kia branded cars. One source noted that it is the first auto retailer in this country to provide financing to its customers.
It also sells motorcycles under its own Kolao brand as well as other brands. In this segment it has a market share of about 37%. Other business lines include the sale of complete knock-down (CKD) autos, which it launched earlier this year, a wholesale business of genuine auto parts from suppliers in Korea, Thailand and Vietnam and aftersales services.
Aside from its main operations in Laos, it also does some business in Cambodia and is in the process of expanding into Myanmar.
