Shui On Land raises $261 million from placement

Just one week after the Hopson deal, another Chinese property developer taps the equity market for capital.

Property developer Shui On Land yesterday announced that it had completed a top-up placement, raising HK$2.03 billion ($261 million). This is the second Chinese property developer in as many weeks to raise capital through a sale of new shares.

A total of 418.6 million shares were placed into the market, which represents 10% of the existing issued ordinary share capital of the company and 9.1% of the enlarged share capital.

The shares were offered at a price ranging from HK$4.82 to HK$4.93, which was equivalent to a discount between 6% and 8% versus Wednesday's closing price of HK$5.24. The deal priced at the mid-point, at HK$4.87, for a 7% discount. At the close of trading yesterday, the share price was down by 3%.

The vendor was Shui On Investment Company, a controlling shareholder in Shui On Land, which together with other related parties owned a 54.5% stake in the company before the deal. Since this was a top-up placement, Shui On Investment will now subscribe to the same number of new shares at the same price of HK$4.87 to ensure that all the money ends up with Shui On Land.

The book consisted of approximately 150 accounts and was "heavily" oversubscribed, said one source close to the deal. Investors were described as a good mix of long-only funds and hedge funds. Asian funds dominated, although there was some interest from European accounts. With the book closing before the US market opened, only the earliest of US investors were able to participate.

Shui On Land is a major property developer in mainland China with properties in Shanghai, Dalian, Hangzhou and Chongqing. Perhaps its most famous development is Xintiandi in Shanghai, a block of traditional lane houses renovated into an up-market shopping district.

Most of the money from the placement will be used to develop the company's current land bank, with the remainder to be used as working capital, according to a stock exchange filing.

The company reported a net profit of Rmb2.4 billion ($362 million) for its 2008 financial year, which was largely flat year-on-year. Shanghai projects accounted for approximately 78% of the company's development sales.

A research note released by Macquarie said that Shui On Land, in some ways, had a strong start to 2009: by mid-April it had already achieved around 40% of its full-year sales target of 187,000 square metres. But since many of the units sold were in Chongqing and Wuhan, where property is significantly cheaper than on the coast, the volume sold only translates into 21% of the annual sales target of Rmb3.8 billion.

Another positive pointed out by Macquarie is the fact that the company has secured an Rmb8 billion debt facility from the Agricultural Bank of China, which has alleviated worries relating to outstanding medium-term loans.

The release of the 2008 results in April coincided with a strong rally in the company's share price. Since mid-April, the stock has risen by 39%. Last week it was trading at around HK$5.70, a level not seen since before the financial crisis started last September.

Shui On Land is not the first developer with interests in China to take advantage of good markets to raise capital. Last week, Hopson Development raised $204 million by placing new shares into the market. One big difference between the two deals is that Hopson, due to a particularly long five-day settlement period, attracted few hedge funds. The Shui On transaction had a more standard two-day settlement period, which provides more opportunity to flip the stock, thus making it a more attractive option for investors with a short-term view.

More generally, the placements by Shui On and Hopson could be the start of a series of Chinese developers raising equity. Last summer, when the mainland property market was still heavily depressed, several banks had pipelines clogged up with developers looking for capital. But since most property stocks had taken a dive even before the financial crisis, very few deals went ahead. With the Chinese property market showing strong signs of recovery, it is likely that there will be more deals like this in the near future.

Goldman Sachs acted as global coordinator on the Shui On placement, as well as joint placement agent together with BNP Paribas and Standard Chartered's equity and advisory unit Cazenove Asia.

¬ Haymarket Media Limited. All rights reserved.
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