Digital China's shares placement allegedly 12x oversubscribed

Check out where the proceeds will go.

According to OSK, Digital China (DC) has placed 80m old shares (up from 60m initially) at an offer price of HKD12.70 (high end of its HKD12.50-12.70 range) a 8% discount to yesterday’s closing price. According to market sources, the placement was 12x oversubscribed.

The seller is the Chairman of DC, Mr. Guo Wei (through his wholly owned Kosalaki Investments), and the shares amount to roughly 7.32% of the company. Before the deal, Mr. Guo held 13.67% of DC and post placement, his stake will be reduced to 6.35%.

OSK spoke briefly with DC's IR and were told that the sale proceeds will be used to repay all the debts owed by Kosalaki Investments, which were previously used to purchase shares of DC during 2007 and 2010.

Here's more from OSK:

We expect DC's share price to drop to the placement price of HKD12.50-12.70 immediately after the placement. Although share sale by management and/or major shareholders is usually not a good sign, we believe this sale does not indicate any negative view on the Group.

We remain comfortable with our current FY3/13 net profit forecast. We note that DC's 1H FY3/13 net profit of HKD741m represents 54.6% of our FY3/13 forecast (HKD1,358m) vs. 53.4% in the previous year. More importantly, we remain optimistic that DC’s gross margins will recover to 7% in 3Q FY3/13 (from 6.3% in 2Q FY3/13) in the absence of less aggressive price discounting on IT products and increased contribution from its higher margin IT services and systems businesses.

The counter currently trades at an undemanding 8.6x FY3/14F PE on our estimates, substantially lower than its closest peer Synnex's (2347 TT, NR) 12.7x FY13F PE (per Bloomberg consensus). At the HKD12.50-12.70 placement price, DC’s FY3/14F PE will fall to an even more attractive 7.8x-7.9x. We maintain our BUY rating with a SOTP-derived TP of HKD16.00.