Henan-based property developer Central China Real Estate has raised HK$765 million ($99 million) of private equity through an issue of convertible bonds and warrants to FountainVest Partners (Asia) and West Hill.
FountainVest will buy HK$687 million of bonds, while West Hill will buy HK$78 million of bonds. On conversion of the bonds the investors will own a 10.98% stake in Central China. The bonds convert within six months of issue at a price of HK$3.10 each, which represents a premium of 29.7% over the closing price of Central China shares on the Hong Kong Stock Exchange on August 4 and a similar premium over the volume weighted average closing price for the last five and 10 consecutive trading days up to August 4. The bonds have a 4.9% coupon and an 8% yield to maturity.
Singapore real estate developer CapitaLand currently owns a 27% stake in Central China and will be diluted to 23% after the issue of the bonds to the private equity investors.
FountainVest will also be issued 68.3 million warrants and West Hill will be issued 7.76 million warrants. The warrants exercise at HK$4.10, which represents a premium of 74.5% over the VWAP for the last five consecutive trading days up to August 4. The warrants represent approximately 3.67% of the enlarged share capital assuming the warrants are fully exercised and no other issue of shares is made before the warrants are exercised. The warrants can be exercised any time from the date of issue for a period of five years.
Neither the investors nor the investee company worked with an external adviser on the deal.
"This is our fund's first investment in the real estate sector," said Frank Tang, chief executive officer of China-focussed FountainVest to FinanceAsia. "We haven't disclosed any other investments as our portfolio companies prefer not to be disclosed." With its investment, FountainVest has negotiated the right to nominate one director to the board of Central China.
FountainVest raised $950 million last year from a consortium, including anchor investors Canadian Pension Plan Investment Board, Ontario Teachers' Pension Plan and Temasek Holdings. Tang and some of his partners at FountainVest earlier worked at Temasek.
West Hill Asia is the investment vehicle of Shanghai-based real estate services provider E-House China Holdings.
Central China will receive HK$762 million of net proceeds from the deal which it will use to acquire minority interests, purchase land and for general working capital. In its HKEx filing Central China said it remained confident about the long-term prospects of Henan Province, but in the near-term, the real estate firm expected financial results for 2009 to "decline meaningfully as compared with the corresponding periods in 2008". The company said the deterioration in its results is due to: the impact of the financial crisis on the property market in Henan; the company's decision to delay launch and completion of certain projects, given the market downturn; and margin decline due to lower percentage of revenue contribution from commercial properties in 2009.
Central China said that in the future residential projects in Henan Province would continue to be its primary focus, adding that GDP and urbanisation growth rates in Henan are higher than China's national average. Central China also noted that volatility in housing prices in Henan is lower than that in other major and coastal cities in China.
Central China shares gained 8.8% on the HKEx on Wednesday when they resumed trading after the news of the investment was announced but then lost 4.2% to close at HK$2.49 yesterday, in line with weakness across real estate stocks.