Chinese property developer taps markets again

Neo-China raises $173 million from convertible after shareholders grant approval for more fund raisings to pay for expansion through acquisitions.
Mainland property developer Neo-China Group Holdings last Friday (May 12) tapped the capital markets for cash for the second time in three months as it continues to expand aggressively.

This time it chose to issue HK$1.34 billion ($173 million) worth of convertible bonds that will allow it to raise additional funds at a premium to the future share price û if the stock continues to perform. In February the company raised HK$442 million ($57 million) from a top-up share placement.

Each of the fund raisings accounted for 20% of the companyÆs existing share capital û which is usually the maximum for a Hong Kong-listed company in any given fiscal year. However, the company went back to its shareholders at a special general meeting on May 9 to seek approval for a renewal of the original mandate (granted at the annual general meeting in September 2005) to issue new shares up to 20% of the capital.

Shareholders approved and the CB was said to have been reviewed favourably by investors as the company is raising money for new asset injections that is expected to help boost future earnings. In addition, the mainland property sector is still ôhotö with investors, and sources say the deal was multiple times covered with just under 30 investors taking part.

The convertible bond issue was arranged by JPMorgan who bought the bonds from the company and then sold them on to the market at a fixed price. BOC International acted as joint lead manager.

The zero coupon bonds have a five-year maturity, but investors can put them back to the issuer after three years at 120.103% of face value to give a yield to put of 6.20%. They were issued at par and are redeemable at 135.702% for the same yield.

The bonds are convertible into common shares at HK$1.5048, which represents a premium of 32% over FridayÆs close of HK$1.14. The conversion premium was on the modest side compared with CBs by other Hong Kong-listed issuers over the past month which have ranged from 35% to 50%.

The less aggressive premium may be partly due to the fact that the company has less of a track record than other mainland developers - since most of its development projects are still at a relatively early stage. As a result, its financial performance is also not as spectacular as some of its peers.

However, it may also be an indication that investment banks are beginning to show more restraint with regard to what terms they are willing to promise companies in return for their business.

Given the volatile share price, however, the premium came out to be 40% when based on FridayÆs volume-weighted average price û a measure preferred by many investors who consider it a more fair representation of the current share price level.

The assumptions included a credit spread of 400 basis points over Hibor, a yield dividend protection of 3.5% and a stock borrow costs of 5%, given there is no borrow available.

This bond floor was valued at 92.5% for an implied volatility of 35%, which compared with a 90-day historic volatility of 65%. The share price has doubled in the past six months.

The underwriter offered no asset swaps, underscoring the fact that this was pretty much sold as an equity story.

The company, which is 56.4% owned by its Chairman Li Song Xiao, announced in mid-April that it had entered into an agreement (with the local government) to develop a project in Pi Xian Xi Pu town in Chengdu City, which will require a total investment of Rmb1.2 billion ($150 million).

Earlier the same month it announced it had agreed to acquire a 30% stake in an early-stage residential and commercial development project in Chongqing at a cost of Rmb181 million ($22.6 million). The acquisition came after Neo-China in February signed a memorandum of understanding with two other shareholders of the same project to acquire their combined 70% stake for Rmb422.1 million ($52.6 million).

In the six months to October 2005, the company reported a net profit of HK$127.0 million which included revenues of HK$32.7 million and a gain of HK$125.0 million from the sale of a subsidiary. In the year earlier period, the net profit stood at HK$133.1 million.

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