Hang Lung kicks off sector fundraising with $1.42 billion deal

A rare issuer in the equity markets, Hang Lung Properties takes advantage of a record high share price to raise capital for its further expansion in China.

Hang Lung Properties has become the first among the major Hong Kong property developers to take advantage of the reflation story that is boosting expectations for another round of property price increases and has pushed up the entire Hong Kong property sector.

The real estate flagship of the Hang Lung Group on Thursday evening sold HK$11.01 billion ($1.42 billion) worth of new shares through a top-up placement that was upsized by 9% after the original deal size was about four times covered.

At the final size, the Goldman Sachs-led deal squeezed ahead of Sun Hung Kai Properties’ HK$10.93 billion share sale in October 2007 to become the largest ever follow-on by a Hong Kong issuer and the largest follow-on by a real estate company in Asia ex-Japan. It is also the third largest secondary share sale in Hong Kong this year after Vodafone’s $6.5 billion exit from China Mobile and Goldman Sachs’s $2.25 billion sell-down in Industrial and Commercial Bank of China.

According to bankers, several Hong Kong developers are looking to use the current favourable market environment to boost their coffers and Hang Lung recognised the benefits of being first to market, especially with a deal this size; early issuers in a sector tend to get a better reception by investors both in the primary and secondary market and can generally claim a tighter discount.

The deal was launched after the company’s share price finished at an all-time high on Thursday as global equity markets rallied on the back of the US Federal Reserve’s announcement of more quantitative easing – the injection of more capital into the US markets is expected to lead to higher inflation that will push up asset prices in Hong Kong thanks to the peg between the Hong Kong dollar the US dollar.

But while the timing may have been somewhat opportunistic, Hang Lung chairman Ronnie Chan said a few weeks ago that the company needed to raise capital to finance its expansion in mainland China. According to a statement issued to the Hong Kong stock exchange on Friday, all the net proceeds from the sale will be put into the China business.

The company initially offered 269.396 million shares, but after strong demand from a number of major US investors, the bookrunner went back to the issuer to see if the deal could be increased to give those guys a meaningful allocation. Hang Lung agreed and the final size was fixed at 293.864 million shares, or 7.0% of the existing share capital.

Partly as a result of the enlarged deal size, the price was fixed below the top-end of the range at HK$37.48, for a 7% discount versus Thursday’s close of HK$40.30. The shares were offered in a range between HK$37.08 and HK$37.56, which translated into a discount of 6.8% to 8.0%.

The discount range was quite a bit wider than the earlier China Mobile and ICBC blocks, which priced at discounts of 3.2% and 3.9%, respectively, despite being larger in size. However, neither of those deals was dilutive for existing shareholders since all the shares were secondary. Sources said the wider discount was deemed to be necessary in light of the fact that the offering accounted for 42 days of trading, the record-high close and a 50% rally in the share price since May, including a 6.6% gain since the beginning of November. Indeed, the discount versus the average close in the past five days was significantly tighter at 4.4%. Hang Lung is also the most expensive of the Hong Kong developers and the only one that trades at a premium to net asset value. It is also worth noting that the bookrunners were left holding a portion of the China Mobile block and are widely expected to have made a loss on the transaction, which suggests that the discount was deemed too tight.

Supporting the Hang Lung deal was the fact that analysts are very positive on the company, which in the 12 months to June 30 posted a net profit of HK$23.7 billion (including a HK$2.1 billion property revaluation gain), representing a 355% gain from the previous year. The company is also a rare issuer in the equity market. The last time it sold new shares was in November 2006 when it raised $860 million at an 8% discount to the market price. That deal, which was arranged by Credit Suisse and was also meant to finance development projects in China, was more than six times covered.

And, as mentioned earlier, the demand was strong this time too. According to a source, the offering opened shortly after 6pm Hong Kong time and was covered in 20 minutes. When it closed at 8.30pm it had attracted more than 100 investors, which was said to have comprised a broad range of high-quality long-only accounts.

The share price held up okay in the wake of the deal, and except for one brief dip mid-morning, stayed above the issue price all day. It finished 6.45% below the previous day's close at HK$37.70.

Hang Lung Group’s shareholding in the company will fall to approximately 49% from 52.4% as a result of the top-up placement, but the parent company said it will continue to consolidate the property unit’s earnings.

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