China Resources Land braves the market with placement

The Mainland property developer raises just over $500 million at a 6% discount, while the two developers that issued new shares last week see their share prices tumble.
China Resources Land (CRL) yesterday completed the top-up share placement of just over $500 million that it launched after the end of trading Monday, but the fact that it took almost 24 hours to finish the deal suggests it is getting harder to convince investors about the benefits of buying property stocks at current levels. The shares were priced at the bottom of the indicated range.

This was the third placement by a Mainland real estate developer in three days and brought the total issuance from this sector since last Thursday to $1.5 billion. Such a sizeable supply of new paper appears to have given rise to some property stock fatigue and it obviously didnÆt help that the two developers that issued shares last week have both seen their share prices drop below the placement price.

The entire Hong Kong market extended its losses in the afternoon session yesterday, however, as investors took profits from recent gains and the bidding at a local property auction turned out to be less aggressive than expected. The Hang Seng Index finished down 0.9%, having posted a record close of 20,896 points the previous day.

Greentown China has fallen 10% over two days since its $297 million placement on May 3 and yesterday closed 6.4% below the placement price, while Shimao Property lost a total of 7.9% and slipped 3% below the placement price when it resumed trading yesterday. Shimao and its chairman sold $701 million worth of shares through a partial top-up placement on Friday.

Based on that development, it wouldnÆt be unreasonable to suspect that CRL too will see some degree of pressure when it resumes trading today (May 9) and a source close to the CRL transaction says the performance of Greentown and Shimao did indeed scare off some ômarginal buyersö. These marginal buyers include hedge funds and other short-term players which are typically present on the majority of accelerated bookbuild transactions.

However, the source stresses there was still substantial interest from long-only funds, including those who already owned CRL shares. Most of the demand came from Asia, but there was also a decent order flow both from the US and Australia. UK-based investors got another chance to look at the deal yesterday afternoon to compensate for the fact that it was a holiday in the UK on Monday (otherwise the books closed at noon), but the interest from there remained selective. According to the source, the deal was covered by 10am Hong Kong time yesterday and was fully allocated to about 55 investors by 5pm.

However, bankers not involved in the deal suspected that a portion of the shares had gone to entities within Credit Suisse, which was the sole bookrunner of the deal. Similar speculation was heard after the placements by Greentown and Shimao, but aside from the sharp drop in their share prices (indicating a lack of support from the market), there is no evidence that this would have been the case. The Greentown transaction was arranged by UBS and JPMorgan, while Morgan Stanley acted as sole bookrunner for ShimaoÆs share sale.

Credit Suisse as a bank is very positive on CRL, which is one of its top picks among the Mainland real estate developers, and it is quite possible that this allowed it to take on a bit more risk with regard to this placement than it otherwise would have. However, market sources note that terms pitched by other banks for this deal weren't far off those offered by Credit Suisse.

The CRL deal comprised 400 million existing shares that were sold by the controlling shareholder who will later buy the same amount of new shares at the same price from the company. The transaction accounted for 12% of the outstanding share capital.

The shares were offered at a price between HK$9.81 and HK$10.02, which marked a discount of 4% to 6% to the most recent trading price of HK$10.44 before the stock was suspended from trading at 2.30 pm Monday. The bottom end pricing gave a total deal size of HK$3.92 billion ($503 million).

Like with Greentown, CRLÆs placement came off a record high closing price with the shares up a hefty 37% since March 7, making the new issue potentially that much harder to absorb.

However, investors are buying this stock primarily on the back of expectations of more asset injections by parent company China Resources Holdings, which they hope will boost the companyÆs net asset value as well as its earnings potential.

ôThe most recent injection in November was done at a 12% discount and people expect similar beneficial transactions in the near term,ö says one observer, who also notes that CRL is trading at a wider discount (to NAV) than Shimao and Greentown which suggests room for further upside as its land bank and portfolio of assets continue to grow.

According to several analysts, China Resources Holdings still has six property projects with a total attributable gross floor area of 4.9 million square metres that are expected to be acquired by the listco over the next three years.

Last year, CRL expanded its land bank by 2.8 million sqm of GFA to 8.2 million sqm and reported a 123% rise in net profit to HK$859 million ($110 million), thanks to a stronger contribution from property sales and a revaluation of investment properties. Its gross profit margin widened substantially to 27.6% from 19.4%.

In connection with the results, Chairman Song Lin said the current estimation is that property completions will reach approximately 620,000 sqm in 2007 and increase to 1.8 million sqm in 2008.

According to a research report, Credit Suisse bases its upbeat projections on
CRLÆs sizeable exposure to investment properties in key cities and a projection that its development earnings will grow at a compound annual growth rate of 50% in the net few years thanks to the companyÆs efforts to beef up its land bank. The investment bank initiated research coverage on the stock in mid-April with an outperform rating and a 12-month target price of HK$13.53.

However, the positive outlook for the company wasnÆt able to offset the fact that the market has had to absorb a lot of Mainland property paper over the past month. Apart from the last three placements, there have also been three equity-linked transactions by New Word China Land, China Overseas Land & Investment and Singapore-listed SPG Land, totalling $975 million, as well as the $1.7 billion initial public offering by Country Garden.

One sign that the appetite is waning somewhat is the fact that the placement discount on the last three transactions have widened with each deal from 3.8% on GreentownÆs $297 million placement via 5.1% on ShimaoÆs $700 million offering to 6% for CRL.

One banker notes though that apart from fashion retailer and fund manager darling Esprit Holdings - in the past 12 months, Hong Kong placements larger than $500 million have all been priced at a discount of at least 5%. The last one to price below was Sun Hung Kai PropertiesÆ $1.01 billion deal on the eve of the global stock market correction on May 9 last year, and even that took a discount of 4.95%.
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