Beijing developer completes $112 million placement, but wants more

Beijing Capital Land to seek shareholders' approval to double the proceeds by selling shares to a real estate investment arm of Singapore's GIC.
Property developer Beijing Capital Land has raised $112 million from a placement of new H-shares, which marks the first leg in a fund raising exercise that aims to eventually secure twice that amount.

As the National Social Security Fund used its right to sell shares corresponding to 10% of the new H-share issue, the total deal size offered to investors by sole bookrunner CLSA overnight on Wednesday (October 26) was HK$960.96 million ($123.5 million).

Since the sale accounted for almost the entire 20% of the total outstanding share capital (18.8% to be exact) that the management is allowed to sell on its own, the company will need shareholdersÆ approval for the second leg. That second sale will comprise the same amount of new shares at the same price as yesterdayÆs transaction, allowing the developer to raise another $112 million. This leg will be sold to only one institutional investor, however.

According to a source close to the offering, the buyer will be Reco Pearl, which is the real estate arm of the Government of Singapore Investment Corp (GIC). Reco Pearl already owns about 24% of Beijing Capital Land.

The money raised will help fund the completion of existing property projects that are meant to be ready during 2007 and for future land acquisitions.

Analysts following the company, say Beijing Capital Land needs to beef up its land bank, which amounts to no more than 4.8 million sqm û below that of similar developers like Guangzhou R&F Properties and Hopson Development.

ôMany of the future acquisitions are believed to be outside of Beijing, which is positive as it will allow the company to move towards becoming a nationwide developer. At a discount of 36% (to net asset value) the stock is also relative attractive,ö one observer says.

At the same time, the companyÆs long-term focus on Beijing, makes it well positioned to win more new projects in the run up to the 2008 Olympics, he adds.

The first leg of the fund raising exercise, which was completed Thursday morning Hong Kong time, was bought by about 100 investors who collectively subscribed to more than eight times the available shares. About 60% of that demand came from Asia, 25% from the US - thanks to a few big orders - and the remaining 15% from Europe.

One obvious reason for the strong demand was the fact that the fixed-price offering was sold at a 13.3% discount versus the most recent close. This was the largest discount on any Hong Kong placement this year, apart from Huabao International HoldingsÆ share sale which was priced at a 21.4% discount as the stock was in the process of re-rating following a reverse takeover that resulted in it moving into a completely different business.

According to sources, Beijing Capital Land was said to have been unwilling to go for a higher price given that it also needs shareholders to approve the second leg of the fund raising plan.

ôIt needs investors to feel that the discount accounts for the dilution caused by the second sale and to make sure that they will vote in favour of the plan to sell more shares,ö the observer says.

The share price has gained strongly since the end of August and is currently up 76.5% in the past 12 months as concerns about corporate governance practices at the firm have begun to ease. However, market watchers say some investors may still require a larger discount to buy the stock based on those earlier concerns and perceptions.

CLSA underwrote the offer, which was launched in Hong Kong at 11pm Wednesday. To capture a sufficient number of investors in both the US and Asia, the books stayed open through the US trading day and remained open for Asian investors until 10am the following day.

The total offer comprised 343.2 million H-shares, of which 312 million were new and 31.2 million were existing shares sold by the NSSF. The price was set at HK$2.80, or 13.3% below WednesdayÆs closing price of HK$3.23

The stock resumed trading on August 29 after a two-month suspension which was prompted by the detention of the companyÆs chairman, Liu Xiaoguang, for questioning relating to the investigation of former Beijing Vice Mayor Liu Zhihua, whose responsibility it was to oversee the development projects related to the Beijing Olympics.

In a statement issued on August 29, the company said its chairman had been released and had returned to his normal businesses at the company. It also stressed that Beijing Capital Land was not involved in the matter for which the former vice mayor was being probed.

ôThe company is operating its business in its usual normal manner and the financial status of the company is normal,ö it said.

Relieved investors pushed the share price 21.3% higher on the first day it resumed trading, although part of that gain was likely due to the stock having missed the correction among its property peers and needing to catch up. Before yesterdayÆs placement, the stock had added 42% since resuming trading.

BOC International analyst Manfred Ho said in a research note issued at the time the company resumed trading that the ôrisks from the said investigation will become more remote after the Stock Exchange of Hong Kong approved the resumption of trading of its H-shares.ö It was positive, he said, that the legal advise the company had received from its lawyers in China was that all acquisitions of land by the company had been completed in accordance with regulations and relevant laws.

The companyÆs decision to ask its auditor PricewaterhouseCoopers to conduct a review of the 2006 interim report to look into any potential impact of this matter on the company and also to make sure it has proper internal control procedures in place to safeguard its assets, has reduced the concerns about lax corporate governance and put the company back on investorsÆ buy list, analysts say.

However, while the Hang Seng Index finished at a new all-time closing high of 18,353 points yesterday and is now only 44 points away from breaching its intraday record from March 2000, Beijing Capital Land is still trading 23% below its May high of HK$4.175.
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