The sale, which was arranged by Morgan Stanley, came on the back of a strong day for Hong Kong equities, but still surprised many observers given that the market remains extremely volatile with day-to-day swings in the Hang Seng Index having exceeded 1,000-points no fewer than five times in the past two weeks. And on top of that, many investors have already packed up for the year as they see little reason to risk the gains made so far this year amid these kinds of conditions. This is especially true of hedge funds, which typically are the momentum drivers on block trades because of their ability to make quick decisions on whether to commit large sums of cash.
Many market watchers had therefore assumed that the focus in the final few weeks of the year would be on getting the long list of initial public offerings out the door, while the placement activity would be on hold. Indeed, this was the first placement in a Hong Kong listed stock since Orascom did its second sell-down in Hutchison Telecommunications International two weeks ago.
To go out with a discount range that, even at the top end, was tighter than any other placement done since the subprime-related correction in August, must therefore be regarded as extremely aggressive û if not an outright gamble. According to sources, at least one other bank was invited to have a go at this trade, but turned it down without too much debate on the basis that it would be too risky.
On a technical basis, there should have been no difficulty in placing the deal even at a tight discount since it accounted for no more than 1.3% of BOCÆs H-share capital and only two days worth of trading volume. But such metrics matter little when the market is as volatile as it is now. Complicating matters further, BOCÆs share price rallied 4.7% yesterday to a close of HK$4.24.
ôThe discount is pretty punchy given that the stock was up more than 4% today. Remember, this is the bank in Asia that has acknowledged an involvement with subprime assets and peopleÆs risk appetite is severely hurt at the moment,ö notes one banker.
But Morgan Stanley accepted the challenge, and as of last night, appeared to have pulled it off. The deal was launched at around 5.30pm Hong Kong time yesterday and one source says it was fully covered and closed after less than two hours. Not surprisingly though, there was quite a bit of price sensitivity towards the lower end of the range and the price was fixed at the bottom of the HK$4.09 to HK$4.12 offering range for a 3.5% discount to yesterdayÆs close. At the top end of the price range, the discount would have been 2.8%.
At the final discount, the deal replaces Shun Tak HoldingsÆ $220 million top-up placement in late September as the tightest priced block trade in a Hong Kong-listed stock since August. During this period, only four deals (including BOC) has priced at a discount below 5%. The Shun Tak transaction, which was arranged by CLSA, was done at a 3.6% discount.
There was no information on subscription rates, but the deal was said to have been fully distributed to between 50 and 60 accounts. Given the timing of the deal, most of the buyers were Asia-based.
The deal comprised 1.08 billion shares that are part of the investment that Temasek made in BOC before and during its initial public offering in May 2006. According to the Hong Kong stock exchange website, the Singapore investment company held 15.5% of the H-share capital before this transaction. Temasek didnÆt give any reasons for why it chose to sell now, but the stock has gained 44% since the IPO and the firm is obviously sitting on a sizeable profit. It also didnÆt say what it would use the proceeds for. Some of its BOC shares are locked up until December 2008.
Sources say investors were interested in the BOC stock partly because its H-share price has come off 18.3% from the peak of HK$5.19 on November 1, underperforming its peers that are down by 12%-15% in the same period. The stock also trades at attractive valuation multiples compared with some of the other Chinese banks that are listed in Hong Kong. These include a 2008 price-to-earnings multiple of 12 times and a price-to-book multiple of 2.2 times for the same year. By comparison, the other Chinese banks trade at 15 to 24 times next yearÆs earnings and at 3.2 to five times their estimated 2008 book value.
The fact that the bank has set aside a combined $473 million to cover impairment losses in asset-backed securities and collateralised debt obligations based on subprime assets didnÆt seem to affect the investor appetite at all, one source says.
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