Concept creation
Huatai Securities’ US$1.7bn landmark sale of global depositary receipts in London marked the launch of a long-awaited trading link between Shanghai and London, deepening ties between the two financial centres and opening a new channel for Chinese companies to raise funds.
The listing beat expectations in every way. Support from UK and global funds – including some US$100m orders – allowed Huatai to sell more stock than originally planned, and secondary liquidity has been surprisingly strong with a healthy amount of stock remaining in London, even though the GDRs are fungible with Huatai’s domestic shares.
In a further vote of confidence in the new concept, several Chinese companies are already planning copycat issues, including Shanghai-listed SDIC Power and Shanghai and Hong Kong-listed China Pacific Insurance (Group).
As the first to attempt a GDR offering under the long-awaited Shanghai-London Stock Connect trading link, Huatai had to overcome all manner of regulatory and technical issues, including concerns around currency conversion that had delayed the launch in November 2018.
After China’s central bank and foreign exchange regulator clarified their position on renminbi payments for cross-border depositary receipts in May, Huatai was ready to move quickly.
A base offering of 75m GDRs, or 9.1% of the outstanding share capital, was marketed at US$20.00–$24.50 apiece. With each GDR representing 10 A-shares, the range offered a discount of 7.9%–24.8% to the company’s latest closing price in Shanghai.
Huatai, which is listed in Shanghai and Hong Kong, managed to generate a decent level of appetite from UK investors despite its low international profile.
Contrary to earlier expectations, there was substantial interest from non-Chinese investors, largely from long-only global EM funds and global hedge funds.
The final book was split roughly equally between Asia and the UK, with the top 10 accounts taking 70% of the deal.
Pricing settled at US$20.50, a discount of 26% to Huatai’s A-share close of Rmb19.28 at the time.
The GDRs are fungible with the A-shares after a 120-day conversion lock-up period, with holders getting the cash value on conversion rather than actual A-shares.
The discount narrowed since Huatai started trading in London on June 17 and disappeared entirely after the lock-up period expired in October. With less incentive for investors to convert to A-shares, liquidity in London has been higher than expected. By the end of IFR’s review period, 30-day average daily trading volume was around 1m GDRs.
The GDRs have been above water since listing, touching a high of US$26.045 in September, 27% above the IPO price.
Huatai Financial, JP Morgan and Morgan Stanley were global coordinators, and bookrunners with Credit Suisse and HSBC.
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