The Credit Suisse-led deal is interesting not only because it is the first placement in a Hong Kong-listed company since the equity market started recovering from the subprime-related correction, but also because it comes less than four months after Temasek bought shares in Greentown at a higher price.
The reason why the Singapore government-owned entity is selling so soon after that purchase was not disclosed to investors, and with no seat on the board, it was certainly free to exit at any time just like any other financial investor. Still, the divestment raises the question of whether its change of heart is related to its outlook for this company - or indeed for the Chinese property sector as a whole.
It is noteworthy that Temasek also sold its entire 5.9% stake in Hopson Development in November 2006. However, a majority of the analysts following Greentown are still positive and believe that there is room for more share price gains.
In spite of the latest acquisition, Temasek will have made money on its overall investment in Greentown as it first bought in during the companyÆs initial public offering in June last year at a price of HK$8.22. According to sources, it also made additional purchases in the market after the stock had risen about 50%. However, just over 40% of its total holdings, or 33.5 million shares, were bought when Greentown issued new shares at a placement in early May this year û and those shares it bought at HK$16.35 apiece.
Last night, Temasek was offering the shares between HK$16.10 and HK$16.40, which could have seen it at least get its money back even on the most recent investment (excluding expenses). Not surprisingly though, given the current volatile markets, the deal was priced at the bottom of the range.
The final price translates into a 7.5% discount to yesterdayÆs close of HK$17.40, which would have been considered quite generous under ônormalö market circumstances but was probably necessary in light of the huge day-to-day and intraday price swings that have become the norm over the past couple of weeks. Indeed, sources say it took more than four hours just to fill the book and getting it to a stage where it was slightly oversubscribed required the participation from both European and US investors.
However, the deal did get done and in the end attracted about 40 investors. The final book was said to have contained some lumpy orders from long-only funds and smaller interest from hedge funds and high net-worth individuals. Hedge funds are seen particularly reluctant to get involved at the moment, although observers say they are more likely to participate in IPOs or placements where they can buy shares at a discount than to trade in the secondary market.
That said, in times of high market volatility (like we are seeing now) hedge funds tend to be very cautious about the liquidity in the stocks they buy and the daily trading volume will often determine the size of their orders.
This is likely to have been an issue with Greentown which in the past six months have traded an average of only 6 million shares, or $13 million, per day. Based on that, yesterdayÆs entire placement of 82.867 million shares accounted for almost two weeks of trading. In a market that has seen intraday swings of 800 to 1,000 points in recent weeks, that is quite a lot.
GreentownÆs share price has been edging higher over the past two weeks, but unlike the Hang Seng Index û which has recovered 100% of what it lost in the downturn û the property developer is still 11% below its all-time high from July 24. YesterdayÆs close of HK$17.40 is also only barely above the $17 where it traded at the time of its primary share placement on May 3.
The stock has more than doubled from the IPO price, however, and investors could also take comfort in the fact that 13 of the 16 analysts who cover the company, according to Bloomberg, have a buy recommendation on the stock> The other three advises investors to hold. Their average target price is HK$19.12 although that is somewhat inflated by Lehman BrothersÆ aggressive upgrade of its 12-month target to HK$27.78 yesterday.
Analysts at the US investment bank base their projections on a 10% premium to forward optimised net asset value, which takes into account a sharp upward revision to their NAV estimate in wake of GreentownÆs aggressive expansion of its land bank to 13.5 million square metres from 8 million sqm in the past eight months.
Despite the acquisition of new land, the stock is still trading at a 16% discount to its current NAV and at an ôattractiveö 2007 price-to-earnings multiple of 14.1 times, analysts Paul Louie and Jackie Choy note in a report. This compares with larger peers like China Overseas Land & Investment and Guangzhou R&F property, which are valued at premiums to NAV of 80% and 56% respectively.
But their optimism is based on more than pure valuations.
ôWe find that Greentown offers a good fit with our three themes of a high-growth land bank, a large exposure to second tier cities and the highest proportion exposure to Shanghai,ö they say.
This was the first placement in Hong Kong since China National Building Material sold $341 million worth of mainly new H shares on August 9 with the help of Morgan Stanley. That deal, which came in the middle of the 3.5-week correction that shaved more than 3,000 points (13%) off the Hang Seng Index, was priced at the bottom of the range for a 9.8% discount to the most recent close and triggered a 28% plunge in the share price over the following five sessions. Including the afternoon during which CNBM was suspended to carry out the placement, the HSI fell 8.3% in the same period.
CNBM has regained all of that ground since then and yesterday closed 6 HK cents above its pre-placement level at HK$19.80, but bankers have been hesitant about bringing another placement as the market has remained unpredictable. Understandably, the buy-side has also become much more sensitive about price and if anything, yesterdayÆs sale showed that this is still the case.
ôThe banks are going to think long and hard about the size, price and names that they take on for a placement,ö notes one observer. ôThere is a thin line between what is acceptable and not, and there are no guarantees - even with a decent discount on a well established name.ö