Ping An: not the whole picture
15 March 2011
Ping An Insurance (Group) Company of China, Ltd. (Ping An) has conditionally agreed to issue 272m new H shares to a company indirectly wholly owned by Cheng Yu Tung (Mr Cheng), the New World tycoon, at HK$71.50 per share, a 12.5% discount to market price. The shares are equivalent to 3.56% of the existing issued shares, and 9.52% of the existing issued H-shares. The subscription will raise HK$19.49bn (US$2.5bn) before expenses, the amount of which will be disclosed "in a separate announcement". The deal was brokered by Goldman Sachs (Asia) LLC, and China International Capital Hong Kong Securities Ltd was the financial adviser to Ping An. At 11:28 this morning, the stock is down 6%, wiping about HK$14bn off the market value of the existing H-shares.
Comments:
- If a listed company wishes to raise new equity, then it should offer the shares to existing shareholders in a rights issue, so that all shareholders can receive the benefit of the discount rather than passing it to a new subscriber. That is why we have consistently urged the Stock Exchange to reduce the general issue mandate and why investors continue to vote against the mandate.
- Ping An has not offered any justification as to why the shares should be placed with this particular investor, Mr Cheng.
- Ping An may claim that it did a placing in the interests of speed, relative to a rights issue that can take weeks. That would only be a justification if Ping An was in urgent need of equity. Is it? Ping An claims not. In any event, we note that the subscription has not yet been completed and may require regulatory approvals from CIRC and CSRC on the mainland, which could take weeks, negating the argument. The agreement with Mr Cheng allows 3 months for completion.
- Ping An's announcement fails to disclose that Mr Cheng also has a short interest in 196m H-shares of Ping An (equivalent to 72% of the subscription), in the form of cash-settled unlisted derivatives. The short interest is revealed in his SDI filing. Such an interest may relate to having received a put option or granted a call option (or both) or something else. Perhaps we will see someone issuing derivative warrants on the back of this. Ping An and its advisers should come clean and tell the market what the arrangement is, whether they are involved, and who else is.
- HK$19.49bn is probably too much for Mr Cheng to swallow alone. Net of the short position in derivatives, he may only be a risk-taker for 76m shares costing HK$5.43bn. That's more like his normal deal size.
- Listing Rules require disclosure if fewer than 7 subscribers are involved in a placing, and one should not be able to avoid disclosure by using derivatives to transfer risk while standing behind a single subscriber.
- The announcement mentions a possible 6-month lock-up, but only if this is required by applicable laws, legislation or regulators. As far as we know, there are no such requirements. The existence of Mr Cheng's short interest rather supports that view.
© Webb-site.com, 2011
Organisations in this story
- CHINA INTERNATIONAL CAPITAL CORPORATION HONG KONG SECURITIES LIMITED
- GOLDMAN SACHS (ASIA) L.L.C.
- Goldman Sachs Group, Inc. (The)
- PING AN INSURANCE (GROUP) COMPANY OF CHINA, LTD.
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