Easy acceptance of Non-public shares no longer guaranteed, even for SOE’S.
China Eastern HK 00670 SH 600115 NY CEA
Air China HK 00753 SH 60111
Huishang Bank HK 03698
China National Building Materials
Delta Airlines NY DAL
In contrast to the US, where companies have massaged eps by buying back shares, desperate Chinese companies are issuing more, diluting eps. However, this last-ditch move has become more difficult, thanks to stock market declines starting in mid-2015 and continuing into 2016. Even these “non-public” buyers appear to be balking at buying originally proposed share prices set in 2015 with prices in both Shanghai and Hong Kong down year to date 24.9% and 12.4%, respectively and drastically down from their 52 week highs.
The stock market plummet threatens optimistic equity-raising in China as shown by four companies.
1) China Eastern Airlines proposed a non-public issuance of A shares in 2015 to raise 16B rmb on 4/23 at 6.44rmb a share, (a discount to its close of 7.82rmb). However, the stock last closed at 5.92rmb, representing a decline of 8% from first proposed. Were the share sale to be adjusted – this would mean 1.2 billion less yuan – from the original 15billion. The money is badly needed to buy planes they’ve already agreed to as well as continued shoring up of working capital, last reported current ratio at .28 or a shortfall of 44B rmb, ($6.7B US). The share sale was to be made to a maximum of 10 non-specified pool of investors including security firms, finance companies, life insurers and others. Adding insult to injury – the money was needed to buy planes which are sold in dollars. Since the proposal, the yuan has dropped 6% against the dollar. As shown below, share price drop along with the yuan depreciation results in a proceeds drop of $321 million. The average list price of an Airbus A330 was $250 million. Finally, the new issuance would result in 18% additional shares, on the heels of a 4% increase from a September sale of 469.5 million H shares to Delta Airlines, $DAL, at 7.49hkd/share. Dilution and price drop all at once.
The subscription was projected to close by the end of December. Meanwhile, they’ve been piling on super short-term debt 4.5B RMB since the beginning of the year, maturing in 90 days at 2.5%. This follows 16B rmb worth of short term debt issued in 2015 with maturities of 180-270 days, 6B matured in 2015 and was rolled over while the rest matures in 2016. At the last quarter, it had a current ratio of .28 or a negative 44B rmb (US$ 6Billion).
The 90 day notes appear to show some hope for the offer. Whether it will happen as planned is dependent upon how willing the selected investors are willing to absorb the losses. This would definitely will take some positive reinforcement from the majority owner, the PRC.
2) Air China – attempting to raise 12B RMB, in July of 2015 announced plan to issue non-public A shares at 12.07rmb which at time was a 90% discount to the 20-day average. The parent was to buy about 8% of the shares. The new share count would be increased by 8%. Shortly after the market and the stock went into freefall. Subsequently, on January 5, 2016 it modified the plan at the lower price of 7.89rmb and increased the majority holders share to 33% of the new issue with the additional new shares needed kicking up the new share percent of the total to 11.6%. Based on the current price, the discount on the shares issued has been cut in half. Air China’s last quarter current ratio was at .38 or a shortfall of 33.6B rmb (US$ 5.1 B). Air China also is majority-owned by the PRC along with a 20% interest by Cathay Pacific.
Air China share issuance – based on original, revised & current price:
3) Huishang Bank. Hk 3698 – 1/25/2016, Announced a delay in raising 2.3B hkd via completion of non-public issue of H shares, reportedly due to a long date technicality. Originally 572 million shares were to be sold to China KingKong at 4.09 HKD. The price in December was recognized as a premium of 20% over average 10-day price. The last closing price was 3.43 about or 16% lower than the December agreed upon price. The sale was made pursuant to the allowance of an additional 20% of shares proposed at the annual meeting with proceeds needed to enhance capital.
The technical reason could be real. However, this follows a failed earlier attempt to sell shares to Gome Electrical Appliances by Feb, 2015. That proposal was for 471 million H shares at 3.8 hkd. That agreement lapsed and was terminated on 1/31/2015.
Additionally, the bank has yet to issue a proposed 1,288 million shares on the Shanghai stock exchange. Last npl ratio reported at just .97 (vs. big 4 banks ranging from 1.4% to 1.83% – both probably under-stated but Huishang looks most suspect). Core tier 1 capital ratio declined from 11.5 in December to 9.7 in June, 2015. Lots of resignations recently also don’t look good.
Huishang bank is the first regional joint stock commercial bank in China and was listed in Hong Kong November 12, 2013.
4) China National Building Materials, hk 03323- At Annual General Meeting announced option to issue shares – up to 20% of existing H shares. At time of meeting, 5/22/2015, shares were at 7.99 hkd; latest price was 3.18 hkd– 60% drop. No mention since then of going forward with share issue, instead issued notice of controlling shareholder contemplating restructure. – with cement prices plummeting, reflecting dwindling demand and competition, capital raising becoming exhausted – super short term non-public notes issued monthly, mostly to replace matured super short term non-public notes; the maximum approved perpetual bonds, things definitely look ripe for restructure.
The last quarter 9 months’ performance saw revenue dropping by 8% and eps by 29%. In the more detailed semi-annual report, price drops from 11% – 22% have failed to revive demand and hit resulted in a loss of 1.2Billion rmb before tax and investment income. The company was a serial issuer of super short term debt – 29.5Billion rmb in 2015 along with 10B in perpetual notes. Despite the bleeding, sales and administrative expenses have actually increased. The company’s current ratio as of 9/30/2015 was .57 with a shortfall of 90.4B rmb ($13.7 B US).
Another state owned enterprise, China National Building Materials states that it is the largest cement, concrete and gypsum board producer in the world. It’s also the majority owner of Taishan Gypsum, currently facing multiple lawsuits for defective drywall sold in the US. The company makes light of the liability, refusing a judgment since 2012, but finally agreeing to pay $3.2 Million US for just 7 homeowners in May, 2015. There are currently 1,200 plaintiffs outstanding. Business insurance in China is still in its infancy and notoriously insufficient.