Hong Kong-listed China Yurun Food Group took advantage of the strength in the Hong Kong equity market last week as well as recent demand for its own shares to complete another placement of new and existing stock. The Chinese pork producer, and its chairman Zhu Yicai, have been selling shares in the company at regular intervals since the IPO in 2005 and have generally been timing the transactions to coincide with new share price highs, but even so, the stock tends to perform well after each deal and investors seem unconcerned about the fact that the chairman continues to reduce his stake.
This latest transaction was completed after the close of trading on Wednesday, less than seven months after the previous placement, and saw the company and Zhu raise a combined HK$3.51 billion ($453 million). The share price had rallied 3.8% to a fresh all-time high earlier in the day and the Hang Seng Index had added 473 points, or 2%, in anticipation of the Federal Reserve’s announcement of further quantitative easing, which was expected later in the global trading session.
However, sources said the possibility of a negative reaction to the Fed announcement and uncertainty about the final outcome of the US elections, made the company keen to push out the deal as quickly as possible. And with the deal was fully covered 45 minutes after the 7pm launch (Hong Kong time), the bookrunners chose to close the books at 8.15pm. Even in that short a time, the deal attracted close to 70 investors and was said to have been well covered.
According to sources, there was a strong response from existing investors as well as other Asia-dedicated global institutions and hedge funds. Given the late launch, the participation of private wealth-type accounts was quite thin, however. The allocations were concentrated at the top of the order book where there were several large orders and the top 10 accounts took two-thirds of the deal.
The sellers offered a combined 117 million shares, or 6.6% of the existing share capital, of which 47 million (40.2%) were new – although issued in the format of a top-up placement. The remaining 70 million were existing shares sold by a company owned by chairman Zhu and his wife. While not quite as large as the previous placement in April, the deal was still chunky at 18% of the free-float and 28 days’ worth of trading volume.
That, together with the strong share price performance (at the time of the deal the stock was up 96% in the past 12 months), meant the demand was quite price sensitive. The deal priced just above the bottom of the range at HK$30 for an 8.8% discount versus Wednesday's close and a 4.4% discount versus the average close in the previous five sessions.
The shares were initially offered in a range between HK$29.95 and HK$30.93, which translated into a 5.0% to 9.0% discount versus the Wednesday close of HK$32.90.
Yurun will raise about $182 million from the share sale before expenses. It didn’t specify what it would use the money for, except to say that it will go towards the expansion of its production capacity.
Zhu’s stake in the company will fall to 25.3% from 30% as a result of the sell-down and the placement, for which his company acted as the initial seller. This was the fourth time that he has sold shares in the company, and each time the deals have been structured the same way with a combination of new and existing shares on offer – a structure investors seem to like. In April, the chairman and Yurun sold a combined $511 million worth of shares at a 9% discount. That deal too came as the stock closed at a 52-week high.
Placements in general are currently viewed by investors as the best way to gain access to, or increase their exposure to, the Asian stock markets – partly because they get to buy at a discount to the market price, and partly because it allows them to buy in big sizes. As the Asian markets continue to edge higher, this demand for more paper is expected to stay strong and chatter in the market suggests that several more issuers are looking to take advantage of this in the near term. The Hang Seng index gained 7.6% last week to a fresh 2.5-year high of 24,876 points on Friday.
The Yurun placement was arranged by Morgan Stanley, which has been involved in three of the four placements since the IPO. However, this was the first time it led the deal on a sole basis. The previous two deals it arranged together with UBS, which also led the first placement in October 2007 together with Goldman Sachs. Goldman was the sole bookrunner for the IPO.
