Long-term holder exits Chow Tai Fook Jewellery through $103 million block

An undisclosed institutional investor last night sold its remaining stake in Chow Tai Fook Jewellery Group, taking advantage of a 13% jump in the share price earlier in the day.

The block trade was well received and was able to price above the bottom of the range for a 7.2% discount to the close and a total deal size of HK$798.2 million ($103 million).

The deal came after the jewellery retailer that is controlled by Hong Kong tycoon and New World Development chairman Cheng Yu Tung announced after the market closed on Tuesday that its revenues surged 63% in the three months to June compared to the same period a year earlier.

It attributed the growth primarily to an increase in the sale of gold products following the sharp drop in the spot gold price since April this year. Same store sales growth of gold products amounted to 78% and the portion of its overall revenues that was generated by the sale of gold products increased to 69% in the past three months from 57.4% in the fiscal year to March 2013.

While the gold price has continued to edge lower since then, the drop was particularly steep during a four-day period in mid-April when the spot price plunged 14%, leading to a rush to buy gold jewellery in Hong Kong, Macau and mainland China, which are Chow Tai Fook’s key markets.

However, the company said in its 2013 annual report, which was published at the end of June, that the gold buying spree seen in April would likely only be a short-term stimulation as people were drawn to buy gold products in advance. Spot gold is currently trading at around $1,250 per ounce, which is down from about $1,370 at the end of the four-day collapse in April and well below the price of $1,675 at the end of last year.

Aside from yesterday’s spike, Chow Tai Fook’s share price hasn’t benefitted from the pick-up in sales, but rather has been sliding alongside the gold price. At present the stock is down 26% year-to-date and it has lost 39% since its IPO in December 2011, which was priced at HK$15 per share.

The vendor, which was said to have been a long-term holder of the stock, offered to sell 93.9 million shares at a price between HK$8.40 and HK$8.70. The price represented a discount of 5.0% to 8.3% versus yesterday’s close of HK$9.16, which in light of the 13% gain earlier in the day was perhaps not overly generous.

However, one source noted that there are big short positions in stocks exposed to the luxury goods sector in China, and Chow Tai Fook’s stronger than expected first quarter revenues led to a bit of a scramble to cover some of those shorts yesterday. The shorts also helped to underpin the demand for the block trade and the deal was covered in 30 minutes, the source said.

The final order book was said to have been multiple times covered, which allowed the bookrunner to fix the price above the bottom of the range at HK$8.50 for a 7.2% discount.

Aside from hedge funds covering short positions, there was also good demand from long-only investors, including existing shareholders who used the placement as an opportunity to top up their holdings. In all, more than 50 investors, mostly from Asia, participated in the transaction, the source said.

The shares on offer represented the entire position held by the seller but only about 1% of the company.

Bankers say investors looking to sell even relatively small positions like this one have started to approach capital markets desks for help to get the stock out as the liquidity in the market has dropped significantly. Yesterday’s turnover of HK$52.8 billion was at the high end of the trading volumes in the Hong Kong market in the past week, but down from a daily average of HK$60.1 billion in May. In the first five months this year, the daily average turnover was HK$68 billion and in the first quarter it was HK$73.9 billion.

The Chow Tai Fook block accounted for about 12 days’ turnover and if the seller had tried to offload the shares in the open market, it would most likely not have been able to capture yesterday’s spike in the share price to the same extent.

As the flow of Hong Kong IPOs has died right down with the onset of summer, the next seven weeks or so are likely to be more about this kind of opportunistic block trades and placements than new listings. However, it is expected to be a trickle of deals rather than a flood.

Many stocks are still down 10% to 15% from their more recent peaks in May and investors are also likely to ask for wider discounts to compensate for the more volatile market environment, which means the prices on offer may not quite meet the expectations of potential sellers.

Meanwhile, a lot of Hong Kong companies and their substantial shareholders are currently in blackouts ahead of the first-half earnings, which limits the number of potential deals even further.

The Chow Tai Fook block trade was arranged by UBS.