China Merchants Property squeezes price of proposed share sale

The offering price is reduced by 27%, but the cut may not be enough for the $753 million placement to go through.

China Merchants Property Development, a subsidiary of China Merchants Group, which is seeking to raise fresh funds through a private placement, has reduced its offering price by nearly 27%, citing the recent crash in property stock prices and Beijing's tightening policies to curb the country's overheated housing market. At the revised price, the Shenzhen-listed developer could raise Rmb5.15 billion ($753 million).

The placement was first announced in July last year but the deal has been grounded ever since as the issuer wouldn't lower the offering price amid a volatile market and the Chinese authorities have been cautious in approving the developers' fundraising plans.

The price cut may seem like a big discount, but may not be enough for the placement to go through given the current market environment and the prevailing share price; the deal looks likely to remain on hold.

China Merchants Property is now offering 250 million A-shares at Rmb20.60 per share to no more than 10 designated investors, the company said in a statement filed with the Shenzhen Stock Exchange yesterday, without giving the names of the institutions that would arrange the deal. The offering comes with a three-year lockup.

The company initially planned to sell 200 million A-shares at Rmb28.12 each, for a total deal size of Rmb5.62 billion ($822 million).

Yesterday's announcement dragged down China Merchants Property's share price by 3.3% to Rmb14.60 -- well below the proposed placement price. The stock has fallen more than 43% so far this year. By comparison, China Vanke, the country's largest property developer by market value, is down 24% year-to-date. The benchmark Shanghai Composite Index has lost 9.1%.

The 10 shareholders targeted by the placement include Shekou Industrial Zone Company and some brokerages, funds, banks and insurance companies in mainland China, the company said.

Shekou Industrial Zone is a wholly owned subsidiary of China Merchants Group and owns 52% of China Merchants Property. The group's other real estate arm, China Merchants Zhangzhou Development, has a 2.2% stake. These two are the biggest and second-biggest shareholders of China Merchants Property.

The company's most recent private placement was in March 2007 when it sold 110 million A-shares at Rmb20.70 apiece to Shekou Industrial Zone and raised Rmb2.3 billion. The developer's share price soared in the months following the deal and reached a historical high of Rmb66.70 on October 31 that year.

Property values in many areas of China surged last year due to a loose credit environment, with property prices in 70 large cities rising 7.8% year-on-year in December, KPMG said in a report released yesterday. The recovery in house prices went hand-in-hand with growth in property development, with new residential floor space increasing at a record 20.8% year-on-year, it said.

To cool down the overheated housing market, the Chinese government is expected to raise the down-payment for buyers of second homes to as much as 50%, compared with 40% under the old system. The State Council, China's cabinet, also said in a statement on April 15 that it is speeding up plans to introduce tax policies that will influence property purchases and returns.

However, observers note that the Chinese government would never use the word "curb" or "clampdown", but instead uses the word "regulate" when talking about tightening measures for the country's property market.

That explicitly shows that Beijing doesn't want the market to cool down too much. It still intends to use the housing market to boost domestic consumption; a prosperous real estate market would generate high demand for furniture, household electrical appliances and various renovation materials. It also creates more job opportunities in the related trades.

The Chinese property developers understand this perfectly and cope with the situation tactfully. They focus on raising capital and increasing land reserves when the policies on house buying tighten, and then shift their efforts to sales when the regulations are loosened again.

¬ Haymarket Media Limited. All rights reserved.
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