New World group seeks $2 billion from rights issues

New World Development aims to raise HK$11.3 billion from a November rights issue and will also underwrite a HK$4.29 billion rights offering for New World China Land in December.
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Managing director Henry Cheng at the company's annual results announcement
<div style="text-align: left;"> Managing director Henry Cheng at the company's annual results announcement </div>

New World Development and its 69%-owned subsidiary, New World China Land, have announced plans to raise a combined HK$15.6 billion ($2 billion) from two separate rights issues in November and December.

In a statement issued yesterday morning, the two Hong Kong-listed companies said that in light of the prevailing market conditions, it is in the best interests of the companies and their shareholders to raise long-term equity funding for general working capital (New World Development) and to refinance existing borrowings and debt (New World China Land) and the best way to do so now is through rights issues.

With Asian stock markets suffering another sell-off yesterday — the Hang Seng Index dropped close to 800 points or 4.2% — that seems like a wise decision. Other companies that have chosen to raise capital through rights issues this year include Lippo Malls Indonesia Retail Trust and Temasek-backed Bank Danamon, CitySpring Infrastructure Trust and Tiger Airways. All of these deals have had, or have, a strong backing by their controlling shareholders, and the same is true for the two New World entities.

Shareholders didn’t seem that impressed, however, as New World Development’s share price dropped 17.6% yesterday. New World China Land lost 25% and finished at a new 12-month low.

New World Development will use a large portion of the proceeds from its HK$11.3 billion ($1.45 billion) rights issue to subscribe to its 69% entitlement in the New World China Land issue and will also act as the sole underwriter for the rest of the issue. This means it will contribute at least HK$2.96 billion towards New World China Land’s fundraising exercise, and perhaps the entire HK$4.29 billion if no other investors choose to participate.

Meanwhile, Chow Tai Fook Enterprises, which is owned by New World Development chairman Cheng Yu-tung and owns 40.5% of the company, will take up its full entitlement in its rights issue and will also underwrite an additional 90 million shares, or up to 45% of the deal. The rest will be underwritten by joint bookrunners HSBC and Standard Chartered. A key reason why Chow Tai Fook is not underwriting a larger portion, according to sources, is that it cannot increase its stake any further without having to make a general offer to minority shareholders. If Chow Tai Fook takes up the additional 90 million shares, its stake will increase to 42%.

After considering other fundraising alternatives, including the issuance of debt securities and share placements, and after taking into account the benefits and costs of each alternative, the companies said they feel a rights issue is the preferred means for raising long-term funds in the current market conditions.

The issues will strengthen their capital base and enhance the group’s overall financial resilience without subjecting it to an interest burden or additional debt, they said. And there will be no dilution to existing shareholders if they choose to participate in the rights issues.

The combined fundraising could be increased to as much as HK$16.7 billion if two CBs issued by New World Development and New World China Land in 2007 are both converted in full and outstanding share options at both companies are exercised before the record date. However, the likelihood of that happening is fairly slim.

Both rights issues will give shareholders the right to subscribe to one new share for every two existing shares they own, meaning the deals will account for 50% of the existing share capital, or 33% or the enlarged capital.

To enable New World Development to raise the funds it needs for the New World China Land rights issue, the two deals will be staggered. New Word Development’s offering has a record date on October 28 and will close on November 22. The record date for the New World China Land deal is a week-and-a-half later on December 2 and its subscription period will run until December 19.

New World Development, a conglomerate whose businesses range from property, infrastructure, hotels and department stores to telecommunications and technology, is offering 1.995 billion new shares at HK$5.68 apiece, which translates into a 36.9% discount versus Monday’s close of HK$9.00 and a 28% discount versus the theoretical ex-rights price (Terp), which works out at HK$7.89 assuming no CB conversion or exercise of options. The price on offer is also 78.2% below the company’s net asset value of HK$26.01 as of June 30 this year.

The rights shares will not carry the right to a HK$0.28 dividend for the fiscal year to June 30 that has already been declared.

Aside from financing the New World China Land rights issue, the conglomerate will use the net proceeds to cover development costs of property projects and for general working capital.

New World China Land, which is mainly involved in property development and property-related investments and hotel operations in China, is offering 2.881 billion new shares at a price of HK$1.49 each. This equals a discount of 33.5% versus Monday’s close of HK$2.24 and a discount of 25.1% versus Terp, which works out at HK$1.99, again assuming no CB conversion or exercise of options. The offer price is at a 79.4% discount to the June 30 NAV.

New World China Land said it will use the net proceeds for property developments and property-related investments in China, and for general working capital.

If no other shareholders participate in the offering, New World Development’s stake in New World China Land will increase to 79.3%. This means the free-float would drop below the required 25%, but the company says if that is the case, the group will take the appropriate steps to restore a sufficient free-float as soon as practicable.

The drop in share prices yesterday left both companies trading below their respective Terp and significantly reduced the offering discount versus the market price. In the case of New World Development, its latest price of HK$7.42 puts the rights issue discount at 23.5%, while for New World China Development, the discount versus yesterday’s close of HK$1.68 is just 11.3%. This may still be enough to convince investors to participate in the rights issues, but it does decrease the attractiveness somewhat.

Before yesterday’s announcement, both companies had seen a slight rebound in their share prices from the lows in early October, but that doesn’t change the fact that they have been on a declining trend throughout this year. Based on Monday’s close, New World Development was down 38.4% year-to-date, while New World China Land had lost 23.3%.

While they are not underwriting the deal, HSBC and Standard Chartered are involved in the New World China Land transaction too, in the role of joint coordinators.

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