The following was posted by Kevin Scully, chairman of NRA Capital, at his blog on Saturday, and is reproduced here with permission. Visit www.nracapital.com
China Animal Healthcare - raises US$45mn through a placement to Blackstone Capital Partners VLP.....what does this mean for one of my Stock Picks
China Animal asked for a trading halt yesterday morning and released its announcement at close to mid-night. The China Animal announcement details its US$45mn fun raising with new strategic investor Blackstone Capital Partners VLP.
The management are viewing the placement to Blackstone Capital as another affirmation by a global fund house as to its fundamental merit.
China Animal already has Legg Mason, Fidelity and soon Blackstone as shareholders.
This affimation is important given the spate of S-chip scandals which has impacted all S-Chips (good and bad).
Over time, the good ones will stand out via their track record, disclosure and how they treat minority shareholders.
The US$45mn fund raising from Blackstone is in the current form:a) placement of 20mn new shares in China Animal at S$0.35b) US$40mn convertible bond (CB) due in 2015
A summary of the CB terms is appended below:
a) US$40mn amount with zero coupon
b) completion expected by end of July 2010 with a long stop date in September 2010 (ie the deal expire)
c) Conversion price - there are a few conditions here
i) if the HK dual listing goes ahead via the issue of new shares then the conversion price will be the issue price on a discounted basis in the schedule of the CB or the minimum conversion price
ii) if the HK dual listing goes ahead but by introduction then the conversion price will be the lower of S$0.40 or 120% of the average price of China Animal 30-days prior to its dual listing in HK
iii) If the dual listing does not occur within nine months of the subscription, the Conversion price will be "the higher of S$0.40 or the minimum conversion price of S$0.288 Should the dual listing not go ahead within nine months - the bondholder shall have the right to redeem the CB fully plus a redemption premium of 15% per annum compounded monthly within 40 days of the lapse of the nine months.
Blackstone will be entitled to appoint a nominee to the Board of China Animal Healthcare as a non-executive director but this director will have no voting rights.
Depending on the conversion price, Blackstone will own between 8.1% and 10.9% of the enlarged capital of China Animal after the placement.
What does this mean for China Animal ?
I think its good for China Animal, ie an endorsement by another major Global fund manager and the appointment of the non-executive director or observer adds provides another entity for oversight.
The share price should at least rise further today to S$0.35, ie the placement price with further upside if and when the HK dual listing occurs to as high as S$0.40.
However, if for some reason the HK dual listing does not go ahead then the shares could fall to S$0.28 - I think this is unlikely but we wont know for another 4-6 months anyway.
S$0.35 is my target price for China Animal and I wanted to review the Q2-2010 numbers before revising it. I will still maintain this view until the results are released. I recommended investors to take profit on half their holdings at S$0.35 and then put China Animal back into my Stock Picks when the shares went down to S$0.27.
For investors, who are nervous about stock markets (market risks), this announcement will provide another opportunity for investors to take profit. For medium term investors who are confident about China Animal's business model and the robustness of its finances as validated by the entry of the new investor, they should wait for its HK dual listing.
