Private equity firm PAG last night raised HK$1.16 billion ($150 million) by selling about 40% of its stake in Haitong Securities, making it the first of the two major cornerstone investors in Haitong’s H-share IPO to reduce its stake.
The securities firm’s Hong Kong-listed shares have had a strong run during the past couple of months and the deal came after the share price hit a record high of HK$13.80 last Friday. Yesterday, the stock closed at HK$13.54, which translates into a gain of 27.7% since the Hong Kong IPO in April last year.
A source said the bookrunner had a leading order of about $50 million as well as other indications of interest that meant the deal was more than two-thirds covered at launch. This gave the bookbuilding good momentum and allowed the deal to be completed in just over an hour, even though it didn’t launch until 7.15pm Hong Kong time.
The investor interest was also boosted by the news that Haitong Securities will be included in the Hang Seng China Enterprises Index, also known as the H-share index, from March 4.
Haitong Securities’ index inclusion, which was announced after the market closed yesterday, will lead to buying of the stock by index funds and other funds that benchmark against the H-share index in the days immediately before March 4, which should help support the share price until then. As a result, investors may have been more confident that the stock will hold up following last night’s placement.
PAG offered to sell 89 million shares at a price between HK$13.07 and HK$13.27, which represented a discount of 2% to 3.5% versus yesterday’s close.
The discount looked quite tight, although one source noted that liquidity in the sector has improved quite a lot in recent months and the block accounted for only about six days of trading. Still, it was not a big surprise that the price was fixed at the bottom of the range for the maximum 3.5% discount.
The placement accounted for approximately 6% of Haitong Securities’ H-share capital and will reduce PAG’s stake of the same to about 8.7%. The sale translated into 0.9% of the company’s overall share capital, including its Shanghai-listed A-shares.
More than 30 investors took part in the transaction although allocations were skewed towards the biggest orders, the source said. Hedge funds accounted for a bit more of the demand than long-only funds and most of the orders came from Asia.
A sell-down by PAG has been on the radar since its IPO lock-up expired in October and several banks were said to have been approaching the firm with suggestions for a block trade after the recent gains — the stock is up 42% since early December.
The private equity firm invested $300 million in Haitong Securities’ $1.8 billion H-share IPO, which made it the biggest among the 11 cornerstone investors. The second biggest was DE Shaw, which bought $100 million worth of shares. The remaining nine cornerstones took smaller stakes of between $10 million and $30 million.
PAG obtained a medium-term loan of $150 million from a syndicate of lenders led by ICBC Securities International to finance part of its cornerstone investment. The loan was secured by all the H-shares it bought in the IPO. ICBC International was added as a joint bookrunner for the institutional tranche when Haitong Securities returned to the market for its second attempt at the IPO in April last year (it postponed the first attempt in December 2011), which was likely a direct result of it helping to secure the PAG order.
The private equity firm will still own about 130.7 million shares in Haitong Securities, which based on the latest market price is valued at about $228 million. The remaining shares will be locked up for only 30 days following this transaction, which is likely to cause speculation that PAG intends to sell the rest of its holdings as well.
Haitong Securities said in mid-January that its operating profit fell 4% in 2012 to Rmb4 billion ($635 million) in 2012, based on unaudited calculations under China Gaap. Basic earnings per share dropped 13.2% to Rmb0.33 per share.
Analysts are generally positive about Haitong Securities with 12 “buys”, versus five “holds” and two “sells”. However, according to data compiled by Bloomberg the average target price is HK$13.71, which implies an upside of only 1.3% from yesterday’s closing price.
One banker also noted that investors have mixed views about the China brokerage sector, with some being very positive, while others don’t like it at all.
Haitong Securities will replace telecom equipment provider ZTE Corp in the 40-member H-share index, with a weighting of 0.71%, according to a press release issued by Hang Seng Indexes, a wholly owned subsidiary of Hang Seng Bank and the manager of the Hang Seng indices.
The three biggest constituents in the H-share index are Bank of China, ICBC and China Construction Bank, which will all have a 10% weighting after the latest quarterly adjustments that take effect from March 4.
The index provider also announced that Lenovo will replace Aluminum Corp of China in the benchmark Hang Seng Index.
The block trade was arranged by UBS after a bidding process that was said to have included at least three banks.
