The completion of a HK$809 million ($104 million) placement for Lee & Man Paper Manufacturing on Friday shows selective follow-on offerings are still possible despite the debilitated state of Hong Kong's equity markets. The deal was launched and closed on the same day a $200 million IPO for People's Telephone was scheduled to price.
However, the latter had still not closed over the weekend while lead manager UBS decided whether to cancel the deal in the face of poor subscription. Its fate is a direct consequence of the difficult debuts of recent IPO's by SMIC and Tom Online, which have undermined the whole Hong Kong/China equity pipeline and may curb a number of issuers' plans over the last few weeks.
But lead manager CLSA was confident about its deal because Lee & Man's share price has been fairly stable over the last two weeks after falling quite heavily at the end of February. A 120 million new share deal was marketed and sold at a fixed price of HK$6.745. This represents a 5% discount to the stock's HK$7.10 close on Wednesday.
Year-to-date the stock is up 15.45% and is still almost double its listing price of HK$4.17 in September last year. It hit an all time high of HK$8.40 at the very beginning of March.
The Lee family, which owned 74.3% of the group pre-offering, subscribed to 67 million new shares and sees its stake reduced slightly to 72%. The transaction equals 6.32% of the company and because the freefloat was only 25%, it will be expanded by almost a quarter.
Books closed five times covered, with participation by just under 50 accounts, of which approximately half were new to the stock. By geography the deal had a split of; Asia 48%, Europe 31% and the US 21%.
Lee & Man is China's second largest manufacturer of cardboard boxes and proceeds are being used to fund a seventh paper mill. The company currently has four machines in operation, one coming on line and a sixth being built.
The seventh machine is due to start operating in July 2005 and by the following the year, the company estimates it will have increased capacity by a further 750,000 tonnes - 63% more than today's output.
Factoring in the impact of the new machines, CLSA has a new target price of HK$9.20. The stock is currently trading at 15.3 times March 2005 forecast earnings.
