Sun Hung Kai Properties issues stock for China expansion

Does new share issue by top Hong Kong property company indicate that the canny Kwok family see this as the "top" of the market?
Jumping on the recent trend, Sun Hung Kai Properties yesterday (May 9) raised HK$7.86 billion ($1.01 billion) from its first share placement in more than 10 years.

The transaction surpassed the previous day's placement by Aluminum Corp of China (Chalco) to become the second largest Hong Kong block trade this year, although the sale did not come without a struggle.

The share price of Hong KongÆs largest property developer is already at its highest level since the Asian financial crisis, and quite a few market watchers are asking themselves how much more upside there can be. Some analysts argue that the companyÆs recent aggressive investments into China, both on its own and through various joint ventures, will open new horizons in terms of net asset value - and are consequently calling for the share price to surpass the psychological HK$100 mark in the near-term.

Still, the company's offer to sell 89 million new shares at a 3.01% to 4.95% discount to the latest record close of HK$92.90 didnÆt seem all that generous. That's because only four of the 13 Hong Kong block trades (of reasonable size) have this year managed to price at a discount of less than 5%.

Also, other Hong Kong property developers shed between 3% and 6% of their market value during yesterdayÆs trading session. The property sub index lost 3.88% in its biggest one-day drop since May 17, 2004 û the day that marked the 2004 trough for most global markets. Sun Hung Kai was suspended yesterday to complete the placement.

Not surprisingly therefore, the Citigroup-led deal was priced at the widest possible discount and at the bottom of the HK$88.30 to HK$90.10 price range. According to market sources the deal was fully covered at this price, although the excess demand was not sufficient to make use of the option to sell an additional 22 million shares.

The placement will still be the largest follow-on share sale by a Hong Kong property company, surpassing New World DevelopmentÆs $686 million offering in February 2004, but doesnÆt make it into the Hong Kong top 10 when including all industries.

The tepid demand was in stark contrast to the previous dayÆs $601 million secondary share sale by Chalco, which attracted orders for more than three times the shares on offer despite pricing the deal at a modest 3.3% discount. ChalcoÆs share price had fallen 14% from its peak in early April, however.

CNOOCÆs larger $1.98 billion placement two weeks ago - at a 5.4% discount - was more than five times covered.

Sun Hung KaiÆs share price has rallied 23% this year, with MondayÆs record close being only cents away from the all-time intraday peak of HK$93.05 reached earlier in the day. The stock has outperformed the 15% gain in the Hang Seng Index as well as the 18% rise in the property sub-index year to date.

However, while the deal looked big - at $1 billion - it actually only accounted for 3.6% of the market capitalisation and less than 12 days worth of trading volumes - which one observer notes was probably what saved it from failing.

Sources say close to 80 investors submitted orders for Sun Hung Kai shares during the more than 12 hours the book was open, with the largest orders coming from investors who already hold shares in the company. There was also said to have been good demand from both high net worth individuals and US-based hedge funds. Some long-only funds sought smaller allocations and were thought to be topping up their sector allocations following the hefty share price declines for Hong KongÆs property stocks yesterday.

The company said it would use the money for land acquisitions and property developments in China, although market watchers say the placement did seem somewhat opportunistic, given the high share price. The Hong Kong market is awash with liquidity - with large capital inflows believed to be related to Bank of ChinaÆs initial public offering which will kick off later this week.

ôIt came as a bit of a surprise, as it wasnÆt known the company had financing needs, but at least it is focusing on its main business line and not doing anything æexoticÆ with the cash,ö one broker says.

However, Clara Lau, a regional credit officer at MoodyÆs ratings agency, says Sun Hung Kai has made quite a number of investments in China over the past 12 months and certainly needs funding to support those.

ôSun Hung Kai is a very conservative company which always maintains a reasonable capital structure and leverage and as a conservative company it will see the strong market as an opportunity to generate additional capital,ö Lau said at a press conference yesterday.

In a recent research report, Morgan Stanley argued that Sun Hung KaiÆs China exposure could reach 19-27% of gross asset value in two to three years from about 11% at present and said the share price should play catch-up with peers who also have a growing China exposure, namely Kerry Properties and Hang Lung Properties.

ôWe firmly believe the recent breakout of the stock is the start of a powerful re-rating, driven by aggressive China expansion and improving capital efficiency,ö analyst Kenny Tse said in the report. ôOur target price of HK$100, based on a 5% premium to our end 2006 net asset valueàcould prove conservative.ö

CLSA, which recently upgraded its target price for the stock to HK$105 (which represents par to its NAV estimate), argued that as investments in China is accelerating, net asset value will likely grow at a faster pace than before. Analyst Keith Yeung noted that Sun Hung Kai has accumulated a land bank of 17.4 million square feet in China, of which 15 million square feet is still under development.

Local investors were believed to have been spooked by yesterdayÆs placement due to the fact that Sun Hung Kai, and the Kwok brothers ,who control the company, have a reputation of being good at calling the top of the market. True or not, rumours quickly started flying that other developers would follow suit to raise funds of their own before it is too late - which added further downward pressure on the sector.

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