Majority shareholder raises $222 million from Chinese Estates placement

Placement raises a few eyebrows.
The controlling shareholder of Hong Kong property developer Chinese Estates has raised HK$1.73 billion ($222 million) from a share placement that raised more than a few eyebrows with respect to the timing.

The CLSA-arranged sale comes on the back of several positive announcements from the company, including two on the same day the placement was launched (February 15). The company also bought back shares in the market through a series of transactions last month û a move that typically signals management's belief that the share price is too low.

Given those developments, observers said, it seems odd the Lau family would want to trim its stake at this time.

People familiar with the offer said a key reason for the sale, aside from reverse inquiry, was a desire to increase the free-float of the stock which is not widely held by institutions and not very actively traded, although the earlier buy-backs seemed to contradict that aim.

The final sale comprised 209 million secondary shares, which were offered by a company controlled by the family trust of Joseph Lau who is an executive director of Chinese Estates and the brother of the companyÆs chairman Thomas Lau. The number of shares was increased from 150 million after an option to boost the size of the block trade was exercised in full.

The price was fixed right at the bottom of the HK$8.30 to HK$8.60 range, which meant the shares were sold at an 8.8% discount to TuesdayÆs closing share price of HK$9.10. The shares, which were suspended from trading on Wednesday pending the completion of the sale, had a bit of a rally in the previous week however, and the discount to the 10-day average closing price was a more modest 1.01%.

About 40 investors participated in the sale, which accounted for 9.98% of the company, and the book was said to have been 1.4 times covered at the bottom of the price range. The price was fixed at the low end before the shares were offered to US investors, however, as the sellers wanted to make sure that the shares could resume trading yesterday.

US accounts took about 24% of the offer, while 19% went to the UK and 57% to Asia. Long only funds and hedge funds were said to have split the offer between them.

ôThe discount to NAV is quite big (at close to 40%) and the company does have a quality portfolio, so as long as the shares are offered at a decent discount (to the market price) there are likely to be interested buyers,ö one analyst said.

Most of the investors were new to the stock and are said to have viewed the placement as an opportunity to get a decent-sized stake in a company, which typically trades only 1.2-1.3 million shares per day. Based on that average, the placement accounted for about 160 daysÆ turnover - a fact that would have been a powerful incentive for long-term investors who are positive on the stock.

Improving the odds further, on the morning of the placement, the company confirmed a widespread market assumption that it is pursuing a possible spin-off of some of its commercial properties into a Real Estate Investment Trust for a separate listing on the Hong Kong stock exchange. The Reit is currently expected in the second quarter and may raise up to HK$5 billion.

ôIf they do a Reit it will create value and help narrow the discount to NAV, plus the company has also hinted that it may use the proceeds to pay a special dividend to existing shareholders." says Adrian Ngan, regiona property analyst at BNP Paribas Peregrine. "That makes it a bit strange that they decide to trim their stake now.

ôIf they really wanted to increase the liquidity they could have issued new shares, which makes that argument sound a bit like an excuse, ô he adds. ôBut these guys are very smart, which suggests there is something else behind the move.ö

The Lau brothers do seem to have a cunning ability to sell at the right time. In the month following the previous placement of secondary shares in April 2004, which was also arranged by CLSA together with Kim Eng Securities, the share price dropped by 50% before it resumed its upward trend. Remarkably though, the Hang Seng Index turned down on exactly the same day and fell 16% before it turned back up again a month later.

Chinese Estates is now trading 71% higher than the 2004 placement price of HK$4.85 after falling 8.3% to HK$8.30 yesterday in the wake of the discounted share sale.

One sales trader recommended his clients to sell short as he saw scope for the share price to drop to as low as $7.20 over the next few months, while a director of a local brokerage noted that retail investors were unhappy with the majority shareholder cashing in at $8.30 when the company was buying back shares at below $8 apiece only a few weeks earlier.

ôLong-term, IÆm still positive on the company as its commercial buildings in Causeway Bay are seeing rental increases and the Reit should add more value, but short-term the market will need to digest a lot of selling pressure,ö the director said.

The stake that Joseph Lau and associates hold in the company will fall to 50.9% from 60.9% following the sale, although the family will still control about 61% thanks to shares held by other members, including Thomas Lau. The free float is further hampered by the fact that Hutchison Whampoa holds about 8.3%.

In a separate statement, also issued on the morning of the share sale, Chinese Estates said it has submitted a request to the authorities to increase the gross floor area of a planned residential project in Macau by 18% to 464,511 square metres. Chinese Estates owns 70% of the project.

It added that it has also prepared a preliminary design proposal for another ôsizeableö themed property development project in Macau and is currently working out the commercial details. However, no binding agreement has been signed for this project, which would include the acquisition of land from a third party.

¬ Haymarket Media Limited. All rights reserved.
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