GCL-Poly upsizes placement to $475 million

GCL-Poly Energy raised HK$3.6 billion ($475 million) via a placement late on Monday night. The deal comes just a month after the company announced the transformational acquisition of polysilicon producer Jiangsu Zhongneng Polysilicon Technology Development.

The deal started with an offering of 970 million new shares, which would have netted around $365 million. A fully exercised upsize option increased the deal size by 33%, bringing the final number of shares sold to 1.3 billion.

One source said that there was talk of increasing the size of the offering even further, beyond the details laid out on the termsheet. The management remains bullish on the company's share price, so it decided that it might be better to wait and raise capital once the price has gone higher.

The shares went out with an indicative price range of between HK$2.81 and HK$2.98 a share, which translates into a discount range of between 12.4% and 17.3% to the last price on Monday. The deal priced at HK$2.83 per share, near the bottom, giving a broad discount of 16.7%. At the close of yesterday's trading, the stock was down by 3.8%.

The book was described as multiply times covered. Both long-only players and hedge funds participated, with a strong showing of high-net worth-investors from mainland China. Most of the demand originated from Asia, but European and US investors also took part. The book was said to be well-balanced because no one type of investor dominated.

The placement is significant because it is the first opportunity for investors to invest in the company since it acquired Zhongneng, a large polysilicon producer, for $3.4 billion in late June. Before the acquisition, GCL-Poly was a power company with a focus on cogeneration power plants; but by absorbing Zhongneng, the business model has fundamentally changed. It is now the largest polysilicon company in China, and one of the largest in Asia.

Last summer, Zhongneng was getting ready to list in New York, but the financial crisis forced the company to abandon these plans and look for alternatives. The placement marks one of the final stages of the new plan. The first step was to inject Zhongneng into GCL-Poly. In order to clean up the balance sheet, GCL-Poly then took out a loan to pay off pre-IPO investors that held exchangeable and convertible bonds. The role of Monday night's placement is to raise capital to pay off that new debt which was, in effect, a bridge loan.  

All of the five analysts that cover GCL-Poly have a "buy" rating on the stock, according to Bloomberg. There are two main reasons that analysts are bullish on the stock: the company's production capacity and its low production costs. During the downturn, Zhongneng continued to increase its capacity. In 2008, it produced 1,800 tonnes of polysilicon. This is expected to increase to 7,500 tonnes this year and 19,500 tonnes in 2011. Its production costs in June were $36.1 per kilogram, compared with between $50 and $100 per kilogram for its domestic peers.

More generally, China's solar industry is expected to benefit from state support. In recent months, the government in Beijing has already announced pilot schemes to promote solar energy, but analysts expect that a nationwide scheme will be announced in the next few months. Furthermore, the rising price of fossil fuels, and the opening up of credit and government support in several countries across the world are expected to increase global demand for solar power equipment.

Morgan Stanley was a bookrunner and the sole global coordinator on the GCL-Poly placement. Bank of China International and UBS were joint bookrunners. ICBC, HSBC and CICC were placing agents.