Luk Fook raises $149 million from top-up placement

Hong Kong-listed jewellery designer, wholesaler and retailer, Luk Fook Holdings (International), yesterday raised HK$1.16 billion ($149 million) from a top-up placement that will be used to fund its expansion plans. The deal was well received by investors who remain keen on the China consumption theme, allowing the 19% upsize option to be used in full.

Given the current market volatility and the fact that the share price has almost tripled in the past few months, investors were price sensitive, however, and in exchange for the increased size, the company had to price at the bottom of the range for a 12% discount.

The shares were offered in a range between HK$23.15 and HK$24.72, which represented a discount of 6% to 12% versus yesterday’s closing price of HK$26.30. The initial issue of 42 million shares was increased to 50 million at the time of pricing, which equalled 10.2% of the existing share capital and about 16 days worth of trading, based on the daily trading volume in the past month. BOC International was the sole arranger.

The deal was launched mid-morning yesterday after the stock was suspended from trading and kept open until 5pm to give European investors a chance to participate and Asian investors a chance to see how Europe opened before firming up their orders. Indeed, in light of the jittery markets of late, one source said many investors didn’t want to put a size on their order until they knew whether Europe would trade up or down.

In the end, the deal was about 3.5 times covered with a few European investors joining the otherwise very Asian order book. The source estimated that about 95% of the demand came from investors based in China, Hong Kong or Singapore, although that included some Hong Kong-based US funds.

High-end retail investors, who typically play a significant role in Hong Kong placements, were largely absent, however, which may be a reflection of the nervous mood in the market.

The massive run-up in the share price – the stock has gained 190% since mid-July, partly on the back of a rising gold price – may also have caused some concern that further upside would be limited. And on top of that the stock is not very well researched. Apart from Standard Chartered, none of the major investment banks has it on their coverage lists.

Instead, the demand came primarily from institutional investors, including Tier-1 and QDII funds. Close to 70 investors participated in the deal. Aside from the capital-raising, this should be positive for Luk Fook, which prior to this deal has had few major institutional investors among its shareholders.

Luk Fook said it will use the money to open new stores in China, Hong Kong, Macau and Singapore; to cover the second phase of a factory expansion and to increase and upgrade its inventory in existing and new stores. It currently has a network of 646 retail outlets, including stores licensed to third-party operators. Of the total 607 are in China, 31 in Hong Kong, two in Canada and one in the US. The remaining five are located in Macau.

In the six months to September, it reported a 69.7% rise in net profit to HK$319.8 million on revenues of HK$3.3 billion.