Longfor follow-on

Longfor pockets $398 million from largest follow-on in five months

But a hedge fund-heavy order book leads to a sell-off in the Chinese property developer in the wake of the transaction.

Longfor Properties on Tuesday night raised HK$3.09 billion ($398 million) from a top-up placement. There have been few follow-ons by Hong Kong-listed companies this year, with most of the placement activity focused on sell-downs by existing shareholders, and this is the largest such deal since early April when Kunlun Energy raised $1.35 billion of fresh equity.

Longfor took advantage of a sharp rise in its share price last week after Wheelock chairman Peter Woo disclosed that he had increased his stake in the Chinese developer to just above 5%. Chinese property stocks were also lifted by the general optimism resulting from the QE3 announcement in the US and the additional stimulus programme announced in China. By the time the deal launched, Longfor had gained 13.4% since last Tuesday and was trading close to the 2012 high of HK$13.14 that it hit two months ago.

The company had been expected to return to the market for some time after it called off an attempt to raise about $500 million in a similar top-up placement in July last year and that has acted as a bit of an overhang on the stock ever since. Longfor is also widely regarded as one of the top-quality property developers in China, so the interest in the deal was no surprise.

The company has a strong brand name and is known for its high customer loyalty, which enables it to command premium pricing. The company’s $912 million IPO in November 2009 attracted top-quality cornerstone investors such as Temasek, the Government of Singapore Investment Corp (GIC) and Hongkong Land.

As it turned out, the early interest came mostly from hedge funds and, while long-only accounts did eventually materialise, sources said their order sizes were on the cautious side and it took until about 9pm Hong Kong time for the deal to get covered (it launched shortly after 5.30pm). When it closed at 10pm, the book was still quite hedge fund-heavy and that put pressure on the share price yesterday.

In all, about 80 accounts took part in the transaction and one source noted that there was a “pretty solid bid” for the stock, although by no means overwhelming. The majority of the demand came from Asia, complemented by some buying out of the US.

The deal comprised 260 million shares, which accounted for about 4.65% of the existing share capital and some 36 days of trading volume. They were offered at a price between HK$11.88 and HK$12.38, which translated into a discount of 4% to 7.9% versus Tuesday’s closing price of HK$12.90.

The discount was slightly wider than on the company’s previous attempt to sell new shares in July last year. That deal was marketed at a 3% to 6% discount, which investors felt was much too tight for the weak market environment at the time, especially since the stock was also trading at record levels — hence the decision to pull the transaction.

And in light of the jump in the share price last week, the relatively low liquidity in the stock and, of course, the modest interest in the deal from long-only investors, it was no great surprise to see Tuesday’s deal price at the bottom of the range for the maximum 7.9% discount.

Even at that price, though, the stock came under pressure yesterday as some of the buyers of the placement were clearly pushing the shares back into the market. At the end of the session, the stock had fallen 8.7% to HK$11.78 — 0.8% below the placement price.

The stock reached a record high of HK$13.84 on July 8, 2011, but after the failed placement attempt a few days later, it fell sharply and by early October hit a low of HK$6.71. Since then it has been on a largely upward trend, albeit with sizeable corrections from time to time. It is currently up 67% from the IPO price of HK$7.07.

Longfor only asked bankers for a bid after the Hong Kong market closed, so there was no time to do much pre-sounding, but given the expectation that there would eventually be a deal, most banks would have had an idea of who the potential buyers were. The deal was handled by Citi and Goldman Sachs as joint placement agents.

It will be interesting to see whether this deal will spark further follow-on activity among the Chinese developers listed in Hong Kong. After Country Garden raised $400 million from a top-up placement at the end of February, the entire sector came under a bit of pressure as investors expected more fundraisings would follow, but that never happened. In fact, at that time Longfor chose to tap the Hong Kong syndicated loan market instead, raising HK$2.4 billion ($309 million) in the form of a three-year floating-rate loan that was priced at Hibor plus 400bp.

Many Chinese property stocks have had a very sharp run-up in recent months, however, which could act as a catalyst for more trades.

According to the term sheet, Longfor will use the placement proceeds to pay for land acquisitions and for general working capital. The company’s projects include a wide range of mid- to high-end residential developments, spanning from high-rise apartment buildings to townhouses and luxury stand-alone houses. It also develops shopping malls and other commercial properties. It has a nationwide presence, but is particularly strong in the Western region of China, the Pan-Bohai Rim and the Yangtze River Delta.

In August, the company bought two plots of land in Chongqing in the Southwest of China at an auction, paying a total of Rmb4.22 billion ($666 million). Both sites will be used for the development of a residential complex with various communal and commercial facilities.

In its interim reports, Longfor noted that transaction volumes and property prices in China stabilised in the first half, despite lingering pressure. “As homebuyers have already adapted to the regulatory measures in place, market sentiment has improved since Chinese New Year, anchored by pent-up demand and a more accommodative credit environment, resulting in the group recording a steady increase in contracted sales volume,” it said. However, it warned that the market will remain challenging and noted that land prices have been increasing as bidding among developers has become quite fierce.

¬ Haymarket Media Limited. All rights reserved.
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