Agile looks to negotiate debt market

Chinese Property developer has mandated HSBC and Morgan Stanley to lead its debut offshore bond deal.
Guangdong-based property developer Agile Property has mandated HSBC and Morgan Stanley to lead a $350 million seven-year non-call four year Reg-S 144a deal.

The deal will begin roadshows on Wednesday (September 6) in Hong Kong, before moving to Singapore on Thursday, and London on Friday. The leads and management team will then meet with investors in the US the following week.

The notes, rated at the issuers ceiling of Ba3/BB rating, mark the debut of Agile in the international debt markets, having already sold its debut IPO last December - when it listed on the Hong Kong Stock Exchange. Presently, Agile has a market cap of HK$21 billion ($2.7 billion).

The deal's most likely comparables are fellow Chinese developers Hopson Development and Shanghai Real Estate (SRE).

Hopson has a $300 million seven-year, non-call five-year deal that matures in 2012. That deal is rated Ba2/BB+ and is quoted at a yield of 8.25%. SRE has $200 million April 2013 issue. That deal, rated B1/BB-, was trading at a yield of 9.625%.

Given that Agile is a year longer and is one notch lower, it will likely price wider than HopsonÆs deal, but should come markedly inside of Shanghai Real Estate due to its better rating and financial profile.

Bankers estimate that fair market value for a new Agile deal would be in the high 8% range, while a pricing in the low 9% area would represent a very attractive level.

AgileÆs land bank was acquired when land was relatively cheap. Its land bank is useful given the introduction of increasingly competitive bidding structures on the mainland, and provides welcome earnings visibility.

Agile has a current land bank of 8.3 million square metres; however that will increase to 14.7 million square metres once it concludes other land grant and transfers that it has entered into. Comparatively, Hopson has a land bank of 12.7 million square metres, while SRE has only 1.4 million.

Compared to Shanghai and its environs, house prices in Guangzhou have been far more stable, rising 20%, compared to 90% in Shanghai. Also helping investors' comfort factor is AgileÆs familiar business model, complete with extensive marketing and advertising activity. The result is high margins per square metre.

Agile enjoys huge brand awareness in Hong Kong, where it is one of the largest advertisers on Chinese language TV and is said to have targeted Hong Kong property buyers from the beginning its operations in 1992. It is primarily known for building retirement and holiday homes across the border and started in Zhongshan, before expanding into the Guangzhou property market in 2000 and Foshan in 2001.

As at July 1, it had 26 property development projects in major cities in the Pearl River Delta region; including Zhongshan, Guangzhou, Huizhou, and Foshan.

Agile holds a range of properties, such as villas, duplexes, apartments and condominiums. Besides residential property business, Agile is also engaged in the development of commercial properties, including retail shops and commercial complexes. By percentage, Agile has 9% based in retail, 45% in villas and townhouses and 46% in apartments.

As disposable income levels have risen on the Mainland, the percentage of Hong Kong and Macau-based buyers has dropped to about 30% of the total. Average income per capita is now higher in Guangzhou than either Shanghai or Beijing, reaching Rmb19,592 ($2,400) in 2004 compared to Rmb18,503 ($2,300) and Rmb17,116 ($2,150) for the other two cities.

The funds will be used to further fund AgileÆs expansion and growth plan.

The noteÆs structure will help to improve the matching of the AgileÆs expansion plans with its cashflow requirements and debt maturity profile.

Of the total $300 million, approximately $290 million will be used to finance the acquisition and development of land that it has signed the land grant or transfer documents for but has not obtained the land use right certificates.

Explicitly, $160 million will go toward financing the Chengdu Shuangliu project; $65 million will go to the Nanjing Qinhuai project; and a further $65 million will go toward the Heyuan project. The remaining proceeds will go toward general working capital.

Last year, Agile reported total revenue of HK$5.25 billion ($675 million), with a net profit margin of 18.3% and an operating margin of 27.3%.

Indeed, S&P noted in its ratings report that Agile's credit measures are strong and that its cash position improved after listing on the Hong Kong Stock Exchange; however its aggressive expansion could hamper cashflow in coming years.

Added S&P: ôAgile's liquidity was strong at the end of June 2006, with net cash of Rmb618 million ($77.8 million). However, its cash position is likely to become tight over the next two years because of its rapid expansion plan, which requires substantial upfront cash over the short term. The company's cash balance could fall to its minimum target of Rmb800 million ($100.8 million) within two years from Rmb2.7 billion ($340 million) at the end of June 2006. As at June 30, 2006, the company was committed to pay Rmb3.4 billion ($428 million) in contracted land costs and Rmb940 million ($118 million) in contracted construction fees, most of which were due within a year.ö
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