Proposed A-share placement
Flat Glass Group (FGG) announced its board proposed to raise up to Rmb6bn via placement of A-shares. The proposal is subject to shareholder approval. FGG plans to issue the new A-shares to maximum of 35 specified investors. The company plans to apply Rmb4.2bn towards production equipment and 1.8bn towards working capital.
The final number of shares to be issued and issuance price has yet to be determined. However, the maximum number of A-shares to be issued would be 509.068m shares or 30% of total A-shares outstanding (1.697bn shares) before the proposed issuance. Including 450m H-shares outstanding, the maximum number of newly issued A-shares is c.23.7% of total outstanding shares before the proposed issuance. Regarding the issuance price, the proposal states the issue price shall be greater than 80% of (or 20% discount to) the average 20-day VWAP prior to the price determination date.
For reference, suppose the price determination date was Jun 1st 2022. The VWAP closing price of A-shares of the previous the previous 20 days was Rmb43.98/share. Applying a 20% discount, the issuance price would have been Rmb35.18/share. Raising the maximum proceeds of Rmb6bn would require issuance of c.170.53m shares or c.8% of the total number of shares outstanding prior to the issuance. Based on the above assumptions, should the transaction be completed in Nov-22, we estimate FY23 earnings should see the full 8% dilution impact.
In mid-May FGG announced plans to raise Rmb4bn via issuance of convertible bonds. Including the A-share issuance FGG had proposed to raise c.Rmb10bn of capital in a month. It was outside our expectation that FGG tapped the capital markets so soon. The proposed 20% discount of the A-share issuance price was also deeper than expected. While we recognize FGG needs financing to pursue its aggressive expansion plan, we would have preferred the company use more of its internal resources.
Given the possible earnings dilution, we expect short term downward pressure on FGG’s share price. Our current recommendation BUY/HOLD on H/A-shares with target price of HK$45/Rmb53. We will review our target prices.