Yangzijiang Shipbuilding Holdings will become the first mainland Chinese company to list in Taiwan following a sale of Taiwan depositary receipts (TDRs) that saw it raise NT$4.51 billion ($141 million). The well-received deal bodes well for other Chinese companies that may want to tap Taiwan’s investor base for fresh capital, and it has also triggered something of a re-rating of Yangzijiang’s Singapore-listed shares as well, sending the stock 6% higher during the share sale.
And the share price has continued to gain every day since the pricing last Wednesday. As of yesterday’s close it was up 12% since the company started taking orders for the TDR sale on August 26. The TDRs are due to start trading in Taiwan tomorrow.
TDRs work just like American depositary receipts in the US; they are certificates representing a specified number of shares that are already listed on an overseas stock exchange. In the case of TDRs, they are denominated in New Taiwan dollars, making them an easy way for local investors to gain access to foreign companies. TDRs as a concept has existed since 1996, but it wasn’t until a relaxation of regulations in the summer of 2008 as part of president Ma Ying-jeou’s more China-friendly policies and initiatives, that the instrument really took off. The regulatory changes opened the door for foreign companies or Taiwanese firms with overseas holding companies and operations in China to list in Taiwan. It also became possible for companies to use 100% of the funds raised in Taiwan for investments on the mainland.
Since April last year, 14 such overseas-listed companies have issued TDRs and listed in Taiwan, but Yanzijiang is the first company that is majority-owned by mainland Chinese parties to make use of the new rules. Bankers say that now the door has been opened many more deals are likely to follow. The next development, they say, is to see a Chinese state-owned company with a Hong Kong listing, also known as H-share companies, issue TDRs. And this isn’t far off – perhaps in the first quarter next year, they say.
Yangzijiang offered 240 million TDRs, representing 120 million Singapore-listed shares, at a price between NT$17 and NT$19. In the end, it fixed the price at NT$18.80 – not because it couldn’t price at the top, but because eight is a lucky number in Chinese. Of the underlying shares, 100 million are new, allowing the company to raise some fresh capital, while 20 million are secondary shares.
Taking into account the exchange ratio and the fact that two TDRs are equal to one common share, the final price translates into a discount of 0.3% versus the company’s Singapore-listed shares. While the Jiangsu-based shipbuilder isn’t the first company to price at a discount, most of the TDR issues so far have been priced at a slight premium. Indeed, one of the attractions of TDRs for the issuers is that they typically trade at a higher valuation than the underlying shares because of the limited opportunities for Taiwanese retail investors to buy foreign equities (it isn’t impossible, but can be quite cumbersome).
According to calculations made by Fubon Securities, by the end of June the 14 TDRs that have listed so far traded at an average premium of 26% versus their underlying common shares and only three traded at a discount. Expectations that Yangzijiang will see a similar increase in its TDR price after listing is likely also part of the reason why its Singapore shares have traded so well recently – the stock is up 40% since late May (the company filed a TDR application with the Taiwan regulators in late June). However, with only about 3% of its enlarged share capital trading in the form of TDRs, strong the demand among Taiwanese investors will only be able to drag the Singapore-listed shares that far.
The offering was more than three times covered, according to a source, who noted that 60%-70% of the deal was allocated to institutional investors while the rest was sold to retail investors. Just over one-third of the institutional tranche was placed with overseas institutions, showing that the interest in TDRs is spreading outside Taiwan as well.
Another reason for the interest may have been that the final price pitched Yangzijiang at a price-to-earnings ratio of about 10 times, which is below the average for its Asian peers. Taiwanese shipbuilder CSBC Corp trade about 15 times.
At the final deal size of $141 million, Yangzijiang is also the second largest TDR to list in Taiwan after Hong Kong-listed noodle maker Tingyi, which raised NT$17.1 billion ($530 million) in December last year. This makes it attractive from a liquidity point of view too. The other TDRs have all been below $100 million and excluding Tingyi and Yangzijiang, the average issue size is only about $37 million. However, this is not out of line with domestic IPOs in Taiwan.
The Yangzijiang offering was arranged by Sinopac Securities as the sole bookrunner with Grand Cathay, KGI Securities and Polaris Securities joining as co-leads.
To begin with, the government’s intention with TDRs was to lure Taiwan-owned companies that were listed overseas back to the homeland to allow the domestic economy and local investors a chance to benefit from and participate in their growth – indeed, when the revival of the TDR scheme was first brought up by the authorities it was, in Chinese, loosely called “return to Taiwan IPOs”.
Following that formula, the first TDR listing after the rule change saw Want Want China, a maker of rice crackers, sell $100 million worth of TDRs with all the underlying shares being secondary and provided by its Taiwanese chairman and CEO Tsai Eng-Meng. This made the listing largely symbolic. But that turned out to be temporary and in the past year and a bit, there has been a steady stream of overseas-listed small and mid-cap issuers looking to tap the Taiwan market, many of which have no tangible connections to the country.
In addition to the premium valuations, the attractions for the issuers include the high liquidity provided by Taiwan’s retail investor base, the convenience of the process and low fees.
Bankers say there are currently six known companies in the pipeline seeking to issue and list TDRs, four from Singapore and two from Hong Kong. Among them is a Hong Kong-listed provider of integrated healthcare devices and services in China, Golden Meditech, which said last week that it is considering selling TDRs and has appointed Polaris as a financial advisor for the proposed deal.
In the announcement, Golden Meditech’s chairman and CEO, Kam Yuen said that based on the track record of TDR issuance, he is confident that the group will be able to enhance the liquidity of its shares while broadening its shareholder base and enable quality investors in Taiwan to invest in the group’s shares. The proposed listing will also promote the group’s image in Taiwan and should help strengthen its existing medical devices and healthcare services beyond China.
