Shenzhou sells $500m CB to build overseas factory

Shenzhou International, a leading Chinese garment exporter, has raised $503 million through a convertible bond issue to help it fund the construction of more factories in Southeast Asia as it seeks to escape rising costs at home.

The Hong Kong-listed company makes clothing for international brands such as Uniqlo, Adidas, Nike and Puma from its production base in Ningbo, to the south of Shanghai, but rising wages and high domestic cotton prices have made it more expensive to manufacture in China.

A stronger renminbi currency has also reduced export demand (the currency appreciated by 26.4% against the yen during 2013).

Shenzhou’s convertible bond, which is its first, allowed the company to raise capital at a fixed cost of 0.5% a year and a yield of 1.25%. The securities, which have a five-year maturity and three-year investor put option, will convert to equity at a premium of 36.5% over the stock’s closing price on Wednesday.

“The CB is the weapon of choice for debut issuers in this market,” said a convertible bonds specialist in Hong Kong. “The time is right both from a technical and investor standpoint — investors are looking for equity exposure and it makes sense for them to get some downside protection, while issuers want to lock in cheap funding before [interest] rates rise.”

Overseas tensions
The money will come in handy as Shenzhou’s overseas expansion in Southeast Asia has faced some problems. The company had to evacuate its factory in Phnom Penh in January after the police shot and killed several protesters nearby who were demonstrating in favour of a minimum wage. The factory, which is responsible for 10% of the company’s production, re-opened within a few days but the incident highlighted the risks involved in manufacturing in low-cost countries.