Shimao sells $240 million worth of new shares

The property developer shakes off a profit warning and becomes the first Hong Kong-listed company to do a follow-on offering since mid-February. Meanwhile, Credit Suisse and Morgan Stanley trim their holdings in China Resources Gas.

Chinese property developer Shimao Property Holdings last night raised HK$1.88 billion ($240 million) from a top-up placement, becoming only the third Hong Kong-listed company to raise fresh capital in size from a follow-on share sale this year and the first since mid-February.

The deal also stands out in terms of size when compared with the growing number of Hong Kong placements that have taken advantage of the rebound in the stockmarket since mid-March. These have all been sell-downs by existing shareholders and have ranged in size from $50 million to $149 million.

Another example of this type of transaction was the HK$360 million ($46 million) sell-down in China Resources Gas Group by Credit Suisse and Morgan Stanley that was also completed last night. The two investment banks sold about one-third of their holdings, which they acquired at a price of HK$3.42 per share five months ago in an attempt to help the company increase its free-float following a reverse takover of Hong Kong-listed China Resources Logic and a subsequent rights issue.

The Shimao deal comprised 270 million existing shares that were sold by chairman Hui Wing Mau at a price of HK$6.95 apiece. Hui will subscribe to the same number of new shares at the same price to ensure the new money ends up with the company. According to the term sheet, the money will be used to repay bank loans.

The shares, which account for 8.3% of the existing share capital, 23% of the free-float and about 15 days worth of trading volume (based on the three-month average), were offered at a price between HK$6.95 and HK$7.25 versus yesterday's closing price of HK$7.70, resulting in a relatively tight discount range of 5.8% to 9.7%. It was therefore no real surprise that the price was fixed at the bottom, but a source says the offering attracted good demand from both existing and new investors and could have priced slightly higher. However, a good aftermarket performance was viewed as more important than to raise an extra few million so the price was kept at HK$6.95 for a 9.7% discount.

Investors were told that the book was covered about half an hour after the 5.45pm launch (Hong Kong time) and when it closed at 7pm the deal had attracted orders for about twice the number of shares on offer. Some 70-80 investors were said to have participated, including some early US risers. The buyers included long-only funds as well as hedge funds and high-net-worth individuals. J.P. Morgan and Morgan Stanley, which were joint bookrunners for the offering, also contributed some private banking demand.  

At $240 million, this was the largest Hong Kong placement since China National Building Material raised $300 million at a 9.5% discount on February 5, also from the sale of new shares. Morgan Stanley was the bookrunner on that deal too, together with China International Capital Corp. A couple of weeks later, fruit and vegetable grower Chaoda Modern Agriculture sold $51 million worth of new shares with the help of UBS.

The timing of the Shimao transaction was a bit surprising since it came on the back of a profit warning by the company earlier in the day. However, sources note that a decline in profits in 2008 was widely expected already and the profit warning contained no real news. Indeed, after the company announced over the weekend that its contracted property sales in the first quarter this year jumped 346% from the same period last year to Rmb4.5 billion ($660 million) the warning was viewed by many as historic information that has already been overtaken by more recent events.

That said, the share price did fall 9% in morning trading but then recovered to finish the day with a much more modest loss of 2.9%. Shimao has had a strong run over the past month, gaining more than 90% from about $4 as investors have become more optimistic that the government's efforts to prop up China's property sector will have a positive impact on demand. Even with those gains, the share price is still at less than half of where it was trading a year ago, which would explain why investors were keen to buy the stock.

Also, the fact that the placement was completed yesterday means that the buyers can sell the shares today -- should they wish to do so -- and still be able to cover their short positions before the Easter break. Top-up placements are settled two days after the actual trade.

Shimao said yesterday that its net profit in 2008 may decrease from the previous year's Rmb4.09 billion ($600 million at today's exchange rate) as no new investment properties were completed during the year and it was also likely to record a small non-cash loss on fair value changes on its existing investment properties due to the property market downturn. In addition, the certification needed to complete a small number of property development projects that were expected by the end of December has been delayed until this year, meaning sales of these properties cannot be booked as part of last year's results. The company didn't specify the size of the projected decline in profits. On the positive side, income for its core property development business remained stable last year and the gross profit margin for 2008 was comparable to that in 2007, it said.

The company also repeated its weekend announcement of a sharp increase in first quarter pre-sales to Rmb4.5 billion. In a report published on March 23, Citi analyst Oscar Choi, said the Shimao management is confident that its current sales target of Rmb15 billion for 2008 will be surpassed. In fact, it may raise that target to Rmb17 billion later on.

"The transaction volume is picking up, showing that market confidence has been restored and the purchasing power which has been accumulated for a certain period of time is being liberated gradually, which will further propel the sales," Shimao said in its weekend release.

The share price rally has also been supported by the fact that the company last month secured a new credit line of Rmb15 billion from the Agricultural Bank of China and another Rmb5 billion from the Industrial and Commercial Bank of China, which reduced earlier concerns about the company's financial position and its ability to repay a $300 million loan in the second half of the year. Yesterday's placement would have boosted investor confidence even further in that respect.

Separately, Credit Suisse and Morgan Stanley jointly sold 100 million shares, or 7% of the share capital, in China Resources Gas at a 19.3% discount to yesterday's closing price. The wide discount was deemed to be necessary since the stock is very illiquid -- the placement accounted for about 290 days worth of trading volume based on the average over the past three months- - and also not very well known in the investment community. The shares were offered in a range between HK$3.60 and HK$3.80 and priced at the bottom.

The sale, which was arranged by the two banks themselves, was said to have been oversubscribed. Credit Suisse and Morgan Stanley still hold about 100 million shares each in the Chinese gas distributor and have committed to a 60-day lockup.

¬ Haymarket Media Limited. All rights reserved.
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