FINA1303 Introduction to Financial Markets

Fall 2014
Group Case Study 1: Equity Securities1
Global Offering of Sinomax
Ms. Shirley Lam is the fund manager of Lam Investment Company Limited, a medium-size
fund house. Recently, she has attended the roadshow meeting organized by Sinomax Group
Limited (hereafter Sinomax) with respect to its global offering of 750 million shares. To
better understand the investment prospects of Sinomax, Ms. Lam instructs her subordinates to
collect and project the financial information about Sinomax as follows:
(a) The announcement and expected time table of the global offering of Sinomax are
provided in Appendix 1.
(b) The company background and IPO details of Sinomax are provided in Appendix 2.
(c) The dividend per share was HK$0.0364 in the financial year of 2013 ended on 31
December.
(d) The price-earnings ratio for the household goods industry is 17.55.
(e) The growth rate in the dividend per share of Sinomax is expected to be in line with the
industry growth rate of 6.25%.
(f) The average beta of similar firms to Sinomax is 1.12.
(g) The yield on 10-year Exchange Fund Notes is 2.005%.
(h) The market risk premium (i.e. market return minus risk-free rate) is 5.8%.
Corporate Actions of Two Other Firms
Apart from the global offering of Sinomax, Ms. Lam is interested in the corporate actions
taken by a couple of companies (see Appendix 3). She asks her subordinates to collect
information about the following corporate actions of two companies:
(a) a share subdivision taken by GCL New Energy Holdings Limited (hereafter GCL New
Energy) (see Appendix 4); and
(b) a distribution in specie taken by Li & Fung Limited (hereafter Li & Fung) (see
Appendices 5 and 6).

This case was written by M. K. Lai for the purpose of class discussion. While inspired by
real life situations, it is not intended to show either effective or ineffective handling of an
administrative issue. Copyright 2014 M. K. Lai.
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Requirement
Suppose that you are the junior analyst working under Ms. Lam. She is going to provide a
1-day bootcamp training workshop about global offerings and corporate actions to a group of
newly recruits in the fund house. As she had recently collected the financial information
about Sinomax, she believes that it will be a good idea to use the company as an example to
discuss the concepts relating to a global offering. She would also like to use some real life
examples to illustrate the concepts of corporate actions. She asks you to prepare a report to
discuss the following issues, which will ultimately serve as the training materials for the
workshop.
(1) Explain the roles played by the following parties in the global offering of Sinomax (see
Appendix 1):
(a) the global coordinator;
(b) the bookrunner;
(c) the sponsor;
(d) the underwriters; and
(e) the selling shareholders.
(2) Explain the following technical terms relating to the global offering of Sinomax (see
Appendices 1 and 2):
(a) the white, the green (Hong Kong e-IPO white), yellow and pink application forms
for the IPO of the domestic tranche;
(b) the final offer price;
(c) the over-allotment option; and
(d) the Hong Kong and international underwriting agreements.
(3) The typical method for determining the offer price of the shares in a global offering is
through the book-building process in a roadshow. Explain the following terms:
(a) the roadshow; and
(b) the book-building process.
(4) An analyst must be able to use a valuation model to determine the fair value of a stock.
You are required to:
(a) Find out the actual issue price per share of Sinomax through the Internet.
(b) Explicitly state out the value of the variables used and calculate the required rate of
return on Sinomaxs stock through the capital asset pricing model.
(c) Explicitly state out the value of the variables used and calculate the fair value of the
stock of Sinomax through the constant growth model. Based on the calculated fair
value, what is your recommendation on Sinomaxs stock?
(d) Explicitly state out the value of the variables used and calculate the fair value of the
stock of Sinomax through the price earnings ratio model. Based on the calculated
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fair value, what is your recommendation on Sinomaxs stock?

(e) Find out the closing price of Sinomaxs stock on the first trading day.
(5) Consider the share subdivision of GCL New Energy:
(a) Describe what a share subdivision is.
(b) What is the impact of a share subdivision on the net assets of a company? Explain
your answer.
(c) What is the impact of a share subdivision on the number of shares outstanding?
Explain your answer.
(d) What is the impact of a share subdivision on the stock price of a company? Explain
your answer.
(e) What is the impact of a share subdivision on the wealth of a companys
shareholders? Explain your answer.
(f)

Find out the closing stock price per share of GCL New Energy on one business day
before the ex-subdivision date and on the ex-subdivision date through the Internet.

(g) Use the closing stock price per share of GCL New Energy on one business day
before the ex-subdivision date to calculate its theoretical ex-subdivision stock price
on the ex-subdivision date.
(6) Consider the distribution in specie of Li & Fung:
(a) Describe what a distribution in specie is.
(b) What is the impact of a distribution in specie on the net assets of a company?
Explain your answer.
(c) What is the impact of a distribution in specie on the number of shares outstanding?
Explain your answer.
(d) What is the impact of a distribution in specie on the stock price of a company?
Explain your answer.
(e) What is the impact of a distribution in specie on the wealth of a companys
shareholders? Explain your answer.
(f) Find out the closing stock price per share of Li & Fung on one business day before
the ex-distribution date and on the ex-distribution date through the Internet.
(g) Calculate the implied stock price per share of Global Brands Group based on (f).
(h) Find out the actual stock price per share of Global Brands Group on its dealing date
through the Internet.
Submission of Group Case Study Report
Your group is required to submit a hardcopy of the report to the instructor at the beginning of
the class on the specified due date with the following structure:
Font: Times New Roman
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Font size: 12
Margin: 2.54 cm on each side
Spacing: single line
Format of Report:

Cover Page (one page): give details of the course and the list of group members with full
names and student ID numbers

Executive Summary (one to two pages): give a summary of the report so that the
instructor can understand the main content in 5 minutes

Main Body (no more than 10 pages)

Appendices (if applicable, no more than 10 pages): supporting documents, tables,

figures, exhibits, etc.

Appendix 2
Company Background
Sinomax Holding was established to engage in the wholesale of polyurethane foams (memory
foams) and export of polyurethane foam products in 2000. At the same time, its factory
located in Dongguan, Peoples Republic of China (PRC), started operations. In 2001,
Sinomax started production of visco-elastic products which had become its flagship products
since then. It established the first point-of-sale for the sale of SINOMAX branded products
in Hong Kong. In 2003, it set up the first point-of-sale in the PRC. The business extended to
the US in 2005.
As part of corporate reorganization, Sinomax Group Limited was incorporated in June 2012
in the Cayman Islands to become the holding company of the Sinomax Group with its
businesses being conducted through its subsidiaries. It mainly manufactures, markets and
distributes quality visco-elastic pillows, mattress toppers and mattresses in the US, Hong
Kong and the PRC. It also sells polyurethane forms tailored to customers needs, primarily to
furniture manufacturers in the PRC. The products are sold under the brands of SINOMAX,
ComfortZen and Dream Serenity, targeted to the medium and high-end market.
On 30 June 2014, the company offers 750 million shares with 20% of new shares and 80% of
sale shares. It intends to raise HK$796 million to HK$ 1.07 billion with the offering price
ranging from HK$1.06 to HK$1.43.

Appendix 2
Issue Particulars
The particulars of the issue are provided as follows:
Item

Particulars

Industry sector

Household goods

Market

Main board

Major shareholder

Sinomax with ownership interest of 54.55%

Number of shares outstanding (before global 1,500 million shares

offering
Number of shares outstanding (after global 1,650 million shares
offering)
Issue price

HK$1.06 to HK$1.48

Total offer size

HK$795 million to HK$1.073 billion

- International tranche

675 million shares

- Domestic tranche

75 million shares

- Total

750 million shares (150 million new shares

and 600 million sale shares)

Historical
net
profit
(excluding RMB 135.761 million
non-controlling interest) in 2013
Market capitalization (after global offering)

HK$1,749 million to $2,360 million

Adjusted net asset value per share

HK$0.41 to HK$0.45

Nominal value

RMB 0.1

Board lot size

2,000 shares

Applicable Exchange Rate

RMB 1 to HK$0.77

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Appendix 3

source: www.etnet.com.hk

Appendix 4

source: GCL New Energy, Announcement 23 May 2014.

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Appendix 5

source: Announcement of Li & Fung, 21 May 2014.

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Appendix 6

source: Announcement of Li & Fung, 26 June 2014.

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