Jiangxi Copper's placement shows Shanghai edge is a no-brainer

JIANGXI COPPER WILL leave its mark in the pages of China's financial history, Unfortunately, it will be a painful chapter for Hong Kong. The company, the mainland's largest copper producer, early this week announced a plan to raise as much as four billion yuan to fund acquisitions by issuing yuan-denominated A shares to its parent and institutional investors. This will make it the first Hong Kong- and Shanghai-listed company to do an A-share placement. The implications for Hong Kong are significant. For the first time, the price premium of a company's A share over its H share is meaningful for the company management. H-share companies have had mainland-listed stock since the 1990s but none has ever raised money in the secondary market back home. That is despite the fact that A shares have been commanding a double-digit pricing premium to the H shares most of the time. Instead, companies have resorted to H-share placements and convertible bond issues to raise new cash. Jiangxi Copper is no exception. It tapped the secondary market in Hong Kong for HK$800 million in mid-2005, although its A shares were listed as early as 2001 and these were trading 25 per cent above the H shares. Time has been a major consideration. Companies need the stamp of the China Securities Regulatory Commission to do a placement, be it of H or A shares, and the queue for placements of yuan-denominated shares has usually been long, with a year's wait the minimum, according to several bankers. Yet, circumstances have changed. 'We are expecting a speedy approval from the regulator,' a company spokesman told me in explaining why Jiangxi Copper had on this occasion opted for the A-share market. Time is particularly important in this case, not because of the pricing but due to a need to get the money before April. In lobbying for shareholders' support to allow its state shares to float in March last year, Jiangxi Copper's parent company had promised to inject assets into the listed entity within a year. The company needs the money to buy the assets. 'The efficiency of the Hong Kong market is not doubted. But it may take us some time to get the regulator's approval. We can't wait,' said the spokesman. Here, we are not talking about the CSRC's well-known bias towards the mainland stock market and its ban on H-share issues. (Refer to my column on February 8.) Being the country's biggest copper company, Jiangxi Copper commands the political clout to squeeze an approval from the regulator for a Hong Kong placement if it sees the need. What's important is that improved infrastructure and a broadened investor base have generated a bigger and more sustainable appetite for A shares, allowing the approval queue time to shorten significantly on the mainland. Even when the CSRC is pressed to 'correct' its bias, these fundamental improvements have happened. For many years, we have labelled the mainland stock market as a casino fit only for hit-and-run public offerings. Management at many H-share companies shared this view. To these executives, the strong after-market and wide trading premium to the H share meant little when the secondary market was in practice not accessible. After all, no matter how juicy it is, an apple is no more than a plant if it is not within reach. This is changing. The shortened queue time has turned the secondary market into a reality. It can now be a long-term financing channel, although there is still room for improvement. The trading difference between A and H shares starts to count. When a financial controller has to decide where to do a placement, there is a genuine choice - Hong Kong or the mainland. Now, Jiangxi Copper has kick-started the change. More firms are expected to follow as mainland enterprises enter an era of mergers and acquisitions and see growing funding needs. Sure, the Hong Kong market remains superior to the one across the border in terms of depth; placement is not just about getting the highest price but, more importantly, getting the shares sold. In the case of Jiangxi Copper, its management is not concerned. With the indicative placement price set at a 10 per cent discount to the 20-day average prior to the announcement, institutional investors have lined up for the shares, according to the spokesman. That will translate into 13.79 yuan per share, which equates to a 29 per cent discount to the stock's last closing price in Shanghai. Even at such a deep discount, the company is getting 47 per cent, or 700 million yuan, more than if it placed shares at the last closing price in Hong Kong. It's a no-brainer.