Although this meant the deal took place on a Friday (May 18), the timing could hardly have been much better from the companyÆs point of view as the share price had rallied close to 15% in the first four days last week, leaving it just 1.8% off the record high close from February. A key reason for the gain was BeijingÆs announcement of an expansion of its Qualified Domestic Institutional Investors (QDII) scheme to also allow commercial banks to buy offshore-listed shares.
Great Wall Motor, which makes pick-up trucks and sport-utility vehicles under its own Great Wall brand as well as automotive parts and components, offered 151.07 million new H-shares at a price between HK$10.65 and HK$11.20 and fixed the priced at the bottom for a total deal size of HK$1.61 billion ($206 million).
The transaction was jointly arranged by ABN AMRO Rothschild and JPMorgan, which both have long-standing relationships with the company.
Sources close to the deal say the price sensitivity among the largest orders would have made it difficult to move the price much higher. The transaction still brought the company up to 50% more capital than it may have been able to raise when it first secured shareholdersÆ approval for the H-share placement in November 2006, when the shares were trading at around HK$8.
The final price represents a discount of 9.75% versus ThursdayÆs close of HK$11.80, or an effective 8.5% when adjusted for the full year dividend of 16 fen (16.3 HK cents). Investors of the share placement wonÆt be entitled to the dividend since a T+10 settlement means the deal wonÆt be completed until after the ex-dividend date on May 23.
Even with that adjustment, the discount is wide compared with the other four Hong Kong placements this month which have changed hands at discounts between 3.8% (Greentown China) and 6.3% (Gome Electrical Appliances). However, at 57.6% of the outstanding H-share capital and 175 daysÆ trading volume, the relative size of this transaction is much larger than those deals and thus would have warranted some additional incentives.
And with the sharp rise in the share price earlier in the week, the placement price simply brought the stock back to where it closed last Monday.
According to sources, the deal attracted about 30-35 investors, primarily China specialist funds. Some of them were said to have been looking at the stock for quite a while, but hadnÆt been able to buy in because of the illiquid trading. Because the transaction had been known to the market since October last year, long-only funds had had plenty of time to make their mind up about whether to buy or not, which meant the time constraints that sometimes prevent them from taking part in placements didnÆt really apply this time.
Hedge funds, on the other hand, werenÆt that numerous. ôGiven the T+10 settlement, this wouldnÆt really have been a deal for the momentum guys,ö notes one observer.
The deal was 144A-registered, but because the placement was carried out during the Hong Kong trading day (while the stock was suspended), onshore US investors didnÆt really get a chance to look at the deal. According to sources, about 11%-12% of the demand came from Europe, while the rest ended up with Asia-based accounts û several of which were believed to represent US interests, however. The order book, which was open from 9am to 6pm Hong Kong time, was between one and two times covered.
While ChinaÆs automobile industry is still struggling with overcapacity that is resulting in margin compression, investors are said to like Great Wall because of its niche production of pick-up trucks and SUVs, which will continue to back up its move into the growing sedan segment. It is also ChinaÆs leading exporter of automobiles with its overseas sales accounting for close to 35% of its total sales last year.
Investors also liked the fact that the use of proceeds from this transaction were well defined, which contrasted to the many Chinese real estate companies that have come to market recently and which tend to have no more specific use for the money than ôland bank acquisitions.ö
Sources say Great Wall Motor will use the money to fund the construction of new production lines related to its diversification into sedan cars. According to the circular issued to seek approval for the share sale, the expansion will focus specifically on five projects that will increase its production capability of automobile parts - rubber parts, engine parts, gearboxes, plastic fuel boxes and cast parts. In October last year, Great Wall Motor estimated the total cost for these five projects at Rmb2.9 billion ($379 million), but in the otherwise almost identical circular issued last week, that estimate was no longer included.
The company has said its development strategy is to ôachieve economies of scale and to expand its product mix to have a more comprehensive vehicle product line in sedans, SUVs and multi-purpose vehicles, with a view to producing 400,000 units of vehicles in 2010.ö Last year it sold a total of 73,580 units, representing a 28.6% increase from 2005.
The company has already revealed a line-up of several sedan models and according to a report on Sina.com, Great Wall CEO Wei Jian Jun expects to receive a sedan license in August this year.
Citigroup analysts have called the groupÆs expansion into the sedan segment encouraging and a key catalyst for the second half of 2007. The investment bank has a buy rating on the stock and a target price of HK$15.60.
Great Wall Motor knew it needed more cash in the fourth quarter last year and secured a shareholdersÆ approval for the oversized offering in November. The approval was needed because according to the general Hong Kong listing rules a company can only issue up to 20% of its outstanding share capital û in this case the H-share capital û in any given 12-month period.
This shareholdersÆ mandate was set to expire at the companyÆs annual general meeting on June û and when the company still hadnÆt received a CSRS approval to go ahead with the share sale as of last Monday, it issued a new circular seeking a renewal of the mandate to issue up to 151.072 million new H-shares. It also added that it may decide to sell the same amount of A-shares instead, likely thinking that it would be easier to get approval for this as the regulators are believed to be prioritising domestic share sales at the moment.
Whether a coincidence or not, three daysÆ later the company suddenly received the long-awaited approval for the H-share sale. With this transaction now in the bag, it will no longer seek approval for an A-share sale at the AGM. That development could have a negative impact on its share price, observers say, since the news of a potential sale of A-shares contributed to Great Wall MotorÆs share price gains last week on the basis that having A-shares in issuance would help to drive up the companyÆs H-share price as well.
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