China Aoyuan Property Group on Friday joined a growing list of Chinese real estate developers to raise capital from a top-up share placement. The Hong Kong-listed company sold HK$622.8 million ($80 million) worth of shares that were priced at the bottom of the indicated range, resulting in a 12.2% discount to Thursday's closing price.
The discount was wider than for a couple of other recent placements for Chinese property developers -- Yanlord came to market at a 10% discount and KWG Property achieved an 8.6% discount -- but was likely deemed necessary since the Aoyuan deal corresponded to a sizeable 16% of its existing share capital and 19 days' worth of trading volume based on the daily average for the past three months. A source close to the offering also noted that the stock isn't that well covered by analysts and has no major institutional shareholders that can act as "natural" buyers of a placement. The latter, together with the fact that it is quite illiquid, means that there isn't much visibility of who the potential buyers might be.
And on top of that, the share price more than doubled between the end of April and June 1, when it reached its 2009 high of HK$2.38, which may have deterred some investors. However, the performance has flattened out since then and Thursday's closing price of HK$1.97 is also 62% below the price at which the company floated in October 2007. The stock was suspended on Friday while the placement was being carried out.
According to the source, the offering was about 1.5-2 times covered, but the quality of the participating investors was not high and, because of the small size of the deal, most of the top investors took no more than $3 million to $5 million each. All in all, some 35 investors participated in the deal. The majority were hedge funds, but a couple of long-only funds also placed orders.
The books closed at around 3pm Hong Kong time after five hours of bookbuilding, but before the bookrunners had time to wrap-up the deal, the placement hit an unexpected snag when an acquisition announced by Aoyuan in May was voted down by the vendor's shareholders. Although the acquisition of Yaubond would have added only 3% to Aoyuan's net asset value, the bookrunners felt the termination of the deal was still material enough that investors needed to be informed. That meant they had to go back to everyone who had committed to buy shares in the placement and explain the new development. As a result, the deal wasn't done until after 9pm. A couple of investors dropped out, but in general the cancelled acquisition was said to have had little impact on the deal -- since the price was already going to be fixed at the bottom of the range, the cancellation couldn't really affect that.
Aoyuan, a Guangdong-based residential real estate developer whose Chinese name means Olympic Gardens, sold 360 million shares at a price of HK$1.73. The indicated range gave it the option to set the price up to HK$1.79, which would have resulted in a discount of 9.1%, but the composition of the final order book dictated that the widest discount was needed. For the same reason, the company also decided not to exercise the upsize option which could have added an additional 90.5 million shares into the deal.
Because this was a top-up placement, the controlling shareholder, Ace Rise Profits, first sold existing shares into the market and then subscribed to the same number of new shares at the same HK$1.73 price. However, the slight dilution resulting from the issuance of new shares means Ace Rise's stake will drop to 44.2% from 51.25% before this deal.
In a statement issued last night, the company said part of the money raised will be used to pay for the recently announced Rmb370 million ($54 million) acquisition of a 41.3% stake in Century Profit, which owns 38% of a commercial and residential development project in Beijing. The rest will go towards general working capital. Aoyuan also stressed that the placement will have the added benefit of enlarging its shareholder base.
None of the money was to be used for the acquisition of 70% of Yaubond, the holding company for a commercial development project in Guangzhou that was voted down on Friday, as the company had already set aside sufficient funds for that transaction.
Aoyuan started off as a residential developer focused on the Guangdong province and, in 2008, derived 58% of its revenues from there. But, in recent years, the company has been expanding into other provinces and cities that are regarded as future high-growth areas, including the Jiangxi and Guangxi provinces and the cities of Chongqing and Shenyang. As of the end of last year, it had a land bank of approximately 5.6 million square metres, which it says is sufficient to meet its development needs for the coming five to seven years.
The company is known for its low-cost land bank, high margins, strong brand recognition in its home province and the fact that its residential projects are all located in affluent high-growth areas. Last year, however, it generated a loss of Rmb57.2 million, compared with a net profit of Rmb602.4 million in 2007.
Morgan Stanley and ABN AMRO (now a part of Royal Bank of Scotland) acted as joint placement agents and underwriters for the offering. Morgan Stanley was one of the two bookrunners when the company went public in 2007, together with Credit Suisse, while RBS has a lending relationship with Aoyuan. In a statement issued last night, the company said that an entity which it intends to acquire indirectly (Magic Falcon Development) entered into a HK$669 million credit facility with the Hong Kong branch of RBS last month.
However, ABN AMRO has also been involved in a couple of deals recently -- Yanlord's $360 million concurrent equity placement and convertible bond and HeidelbergCement's $300 million sell-down in Indocement -- that have been well received and shown that the bank is capable of attracting demand to a company even though its share price has already doubled over the past few months.