The top-up placement, which was completed in the early hours of Tuesday morning, marked the third time the Hong Kong-listed company tapped the international capital markets this year following a similar placement in February and a convertible bond in May. Neo-China has raised $326 million through the three transactions, which is no small feat given the company has a market capitalisation of only $900 million.
Contrary to the first two deals, this latest sale encountered some resistance from investors. According to sources, though, it wasnÆt the companyÆs repeat fund raisings that caused concern, but a feeling that the stock was starting to get pricy after rallying 25.5% over the previous six days as investors reacted positively to an announcement of further land acquisitions.
In order to grow, Mainland developers need to buy more land and to be able to do that they need more cash. Neo-China has been acquiring aggressively and is now sitting on some quality assets, which sets it up for good growth in future years, notes one observer.
ôAs long as the money is put to good use this (frequent fund raisings) is not a concern. In fact, investors want exposure to the company,ö he says.
In response to the hesitation among investors, the company and sole bookrunner JPMorgan agreed to fix the price at a wider-than-planned discount and they also trimmed the initial offering size by 27.5%.
Having originally offered 950 million shares, the company ended up selling only 688 million. The price was set at HK$1.132 for an 8% discount to FridayÆs closing price of HK$1.23. When the deal was lunched mid-morning Monday the offered discount ranged from 4.9% to 7.1%. The final price gave a total deal size of HK$778.8 million, compared with the initial target to raise up to HK$1.11 billion ($143 million) at the top of the price range.
ôThe company was clearly ambitious in wanting to raise more than $140 million, but it needed $100 million upfront for land acquisitions and also wished to accumulate an extra war chest to be able to react to future acquisition opportunities,ö says one source.
When realising that a number of high-quality investors were interested, but ôneeded more juiceö to buy into the transaction the company agreed to lower the price slightly. It also decided to focus the sale directly towards this small group of anchor-type investors and raise only the $100 million it immediately needed, leaving room under its current share sale mandate to conduct another sale at a potentially higher price later, the source adds.
The deal had been fully placed, although with 12 accounts only. In terms of numbers most of the investors were Asia-based, although a sizeable portion of the deal went to the US.
As it was not a bought deal, JPMorgan was under no obligation to cover the original size and in hindsight the adjustments made to the deal to ensure the company would be able to raise enough capital to meet its near-term spending needs seems to have been the right thing to do. Especially since the Hang Seng Index plummeted a hefty 564 points, or 2.9%, yesterday - its worst one-day performance since the September 11 terrorist attacks on New York - while the China-focused H-share index lost 4.5%. The drop came in response to weakness in US markets and a poor Hong Kong land auction and is bound to leave investors much more cautious about follow-on share sales, market watchers say.
Neo-ChinaÆs shares remained suspended yesterday as the placement was being completed, which allowed it to escape the sell-off. However, if the market continues to correct in coming sessions, the developer is highly likely to slide too.
The placement accounted for 12% of the company, which made it less dilutive than the previous two capital raisings that each came close to 20%. But with the transaction corresponding to about 32-days worth of trading volumes, it could take some time to absorb it into the market.
Another potential concern is that having failed to raise the additional $40 million, the company may come back to the market for more funds soon after the three-month lock-up ends, which could act as an overhang on the share price. However, so far the frequent fund raisings have had little noticeable impact on the stock.
The share price has risen 141% from a low of HK$0.51 at the end of June and is now back around the same levels it traded before the global equity market correction in May. This leaves it up 105% year to date, having hit a record closing high of HK$1.26 last Thursday.
The key driver of those gains has been Neo-ChinaÆs aggressive acquisition of land and development projects. Most recently the company announced on November 17 that it had agreed to buy a 71.5% stake in a development project in Xian for Rmb786 million ($100 million) in cash and shares. The commercial and residential complex has a site area of close to 2.6 million square metres and will be developed in three phases. Work on phase one has already begun and the whole project is scheduled to be completed by 2011.
About HK$250 million ($32 million) of the HK$770 million in net proceeds from the latest placement will be used for the Xian project, the company said in a statement issued late last night. HK$400 million with go towards land acquisitions, while the remainder will be used for general working capital.
In connection with the publication of fiscal 2006 (to end April) results on August 21, the company, which will be 50.04% owned by its Chairman Li Song Xiao and concerted parties after the latest acquisition and the placement, said it expects 2007 to be a year in which its development properties will experience ôunprecedented growth in scaleö. The commenced construction area will reach a total of more than 1 million sqm while the completed area is expected to reach approximately 550,000 sqm.
As of that same date, Neo-China had six major projects under development, including three in Beijing and one each in Shenzhen, Tianjin and Chongqing. Together they had a total gross floor area or 3.05 million sqm - an increase of approximately 280% from the end of fiscal 2005.
In February the company raised $57 million from a top-up share placement arranged by Deutsche Bank and in May it pocketed $173 million from the sale of zero coupon convertible bonds through JPMorgan. The bonds have an effective three-year maturity and carry a 32% conversion premium and a 6.2% yield to put.