Fund Raising: Kingsoft And Alibaba Pictures In HK, Mindray To Privatize

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Includes: BABA, KSFTF, MR-OLD
by: Doug Young

Bottom line: The sale of new shares at a discount by Alibaba Pictures and Kingsoft (OTCPK:KSFTF) reflects growing competition for funds in Hong Kong, while Mindray (NYSE:MR-OLD) is likely to seek a China re-listing following its privatization from New York.

A flurry of fund-raising activity on China's periphery is in the headlines as we end the week, led by 2 separate plans by Alibaba's (NYSE:BABA) film unit and software maker Kingsoft (HKEx: 3888) to raise a combined $2 billion. At the same time, medical device maker Mindray has become the latest in a recent string of companies to receive buy-out offers, following years of lackluster performance for its New York-listed shares.

The underlying theme to these 3 stories is a huge stock market rally in China itself, which has seen the benchmark Shanghai index more than double over the last year. That rally is making companies like Mindray envious, prompting many to de-list from New York and target re-listings at home. At the same time, the China effect is also spilling over into adjacent Hong Kong, making it much easier for Chinese companies listed there to also raise new cash.

I've written about this broader trend frequently in the last few months, but one thing I haven't really discussed is what's likely to happen when China's stock rally runs out of steam. When that occurs, many of the buyers of these privatized US-listed Chinese companies may discover they have few options to repay their debt, and be forced to sell their assets at losses. The current strong fund-raising climate in Hong Kong is also likely to quickly evaporate when the rally ends, which is likely by the end of this year.

Let's start with Alibaba Pictures Group (HKEx: 1060), the filmmaker purchased by Alibaba last year that was previously known as ChinaVision. Alibaba discovered accounting irregularities at the company after closing the deal, but presumably all those have been cleared up by now and it has just announced a plan to raise HK$12.2 billion ($1.6 billion) through a private placement. (English article)

Significantly, the placement price of HK$2.90 per share marked a 13 percent discount from Alibaba Pictures' last closing price before the deal was announced. That would indicate that big institutional investors aren't as bullish about the company as the many less sophisticated investors who have fueled China's stock market rally. Still, it's impressive that the company can raise this much money at all, and it's quite possible we'll see it make one or 2 medium-sized acquisitions in the next year.

Next, there's Kingsoft, one of China's leading private software makers, which has just announced its own plan to raise HK$2.72 billion, or about $350 million. (Chinese article) It said it would raise the money by selling more shares at a price of $27.21 apiece, also marking a discount of about 10 percent from its close before the deal was announced.

The deal looks quite targeted, with 80 percent of the funds set to go to Kingsoft's cloud computing unit. I have a healthy respect for the company, which has managed to do well despite its relatively low profile. Thus, I attribute the relatively large discount in both this case and with Alibaba Pictures to the fact that competition for funds in Hong Kong is quite stiff right now, as everyone tries to cash in on the China stock market rally.

Finally, there's Mindray, which said it has received a management-led buyout offer to privatize the company for $30 per American Depository Share. (company announcement) The company's shares actually jumped to slightly above the offer level after the announcement, indicating investors might think a higher bid could be coming.

Mindray certainly fits the profile of companies that have launched privatization bids lately. Its shares have hovered around the $30 level for most of the decade of its life as a publicly traded company, as its growth has slowed lately. Perhaps we'll see a higher bid for Mindray emerge before the company finally goes private, but after it leaves, I doubt that too many investors will notice its absence.

Disclosure: None

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