Stock Insights – What is Private Placement (定向增发)

Hi everyone, today we’ll talk about private placement (定向增发, PPO). Many investors ask how to evaluate share issuances—first, we need to understand what PPO is.

Like convertible bonds, PPO is a refinancing tool. After IPO, companies can raise funds in three ways:

1. Rights Issue (配股): The worst—usually leads to a -5% or limit-down drop the next day.

2. Convertible Bonds (可转债): Currently the most favorable—often causes a price surge upon announcement.

3. Private Placement (定向增发): Raises large sums, sometimes exceeding IPO amounts. While IPOs aren’t scary, post-IPO lock-up expiries, PPOs, and rights issues are—hence the saying "PPO is fiercer than a tiger."

Definition of PPO

PPO is a non-public share issuance to select qualified investors. Regulatory rules:

• Max 35 participants.

• Issue price ≥ 80% of market price (20-day avg).

• 6-month lock-up (no selling post-issuance).

• Controlling shareholders/directors/strategic investors face an 18-month lock-up.

If controlling shareholders join, it’s usually bullish (they’re betting on long-term growth). If they avoid it, it may signal distrust (but not always).

Risks of PPO

PPO isn’t risk-free—especially in bear markets. Example:

• Issue price: ¥8 (20% discount to ¥10 benchmark).

• After 6 months, stock drops to ¥6 → losses.

• The 6-month lock-up is risky; even a 20% discount isn’t always safe.

Short-term traders hate lock-ups, making PPO更适合机构或长期资金。

Use of PPO Funds

1. Working capital (if cash-strapped).

2. Acquisitions (to boost growth narratives, e.g., buying hot-sector assets).

Impact on Stock Price

PPO is neutral—its effect depends on:

1. Asset quality: Buying trending assets (e.g., liquor, green energy) = bullish.

2. EPS dilution: More shares = lower EPS if profits don’t rise (e.g., ¥1 EPS → ¥0.67 after issuance).

3. Insider participation: Full subscription by major shareholders = confidence = bullish.

If PPO injects low-quality assets or smells of tunneling, the market may dump the stock (even limit-down next day).

Profitability of PPO

Historically, profitable PPOs (e.g., CATL, Enjie) succeeded by riding sector trends. Most aren’t guaranteed wins—sector and company matter.

Summary:

• PPO isn’t inherently good/bad—context matters.

• Focus on: asset quality, insider participation.

• Retail investors should avoid blind participation, especially in long-lockup PPOs.