Wharf seeks $1.29 billion to invest in China properties

The Hong Kong conglomerate announces a one-for-10 rights issue at a 31% discount to Thursday's closing price.

Wharf (Holdings), a Hong Kong-listed conglomerate, plans to raise HK$10.05 billion ($1.29 billion) through a renounceable rights issue to fund its property investments in the Chinese mainland.

The company made the announcement two days after China's central bank hiked interest rates for the third time in only three months in an effort to curb the country's runaway inflation and growing asset bubble.

Fast-rising property prices have forced Chinese policymakers to come up with market-dampening measures since early last year. Last month, the authorities welcomed the new year with old resolutions – continue to fight the forming of an asset bubble. Since then, the government has launched a property tax for the first time in Shanghai and Chongqing, and it has increased the down-payment to 60% from 50% for buyers of second homes. On February 8, the People's Bank of China increased the one-year deposit rate and the one-year lending rate by 25 basis points to 3% and 6.06%, respectively.

The first- and second-tier cities in China are crowded with local and Hong Kong property developers fighting for lucrative plots. Two of Wharf's Hong Kong competitors, Sino Land and Hang Lung Properties, raised a total of HK$16 billion via share placements in November last year to fund their China expansion.

Wharf has been actively seeking investment opportunities in the mainland in the past decade and its landbank and investment properties have spread across key cities and new central business districts. In early February, the company said it had bought a site in Changsha, the capital of central China's Hunan province, and another site in Hangzhou, the capital of Zhejiang province, which is located in the eastern part of the country, for a total of Rmb6.28 billion ($950 million) in a land auction. The acquisitions will increase the company's land reserve to more than 125 million square foot of gross floor area.

“Wharf intends to use the net proceeds from the rights issue to finance additional property and related investment in the PRC (People's Republic of China), which is in line with its overall long-term business strategy,” the company said in a statement released late Thursday.

Wharf plans to issue 275.39 million rights shares, which represent 10% of the existing issued share capital and approximately 9.09% of the enlarged share capital after the transaction.

Shareholders will be entitled to one new share for every 10 existing shares they hold, at a price of HK$36.50 each. The offer price represents a 31% discount to the company's closing price of HK$53.05 last Thursday, and a 29% discount to the theoretical ex-rights price (Terp) of HK$51.55, based on the same closing price.

The company has opted for a rights issue rather than a placement because “it would be in the best interest of Wharf and the shareholders as a whole to raise long-term equity capital through a rights issue to finance its future expansion plan and to strengthen its capital base," it said.

The deep discount is likely to allow the issuance to be fully subscribed, just like the company's rights issue in 2007, when Wharf raised HK$9.18 billion via a one-for-eight rights issue, also to fund its investment on the mainland, Citi said in a report. The bank maintained its "buy" rating on the stock with a target price of HK$60.50.

Wharf is 50.02% controlled by Wheelock & Co, which is primarily a holding company for the Wharf business that aside from property development also includes the operation of container terminals and the provision of communications and media services in Hong Kong. Wheelock and two group directors have agreed to take up their full combined entitlement of 50.06% in the rights issue and Wheelock will also underwrite, in full, the remaining portion of the offering, according to Wharf. HSBC is advising Wheelock on the transaction.

The shares will start trading on an ex-rights basis on February 18 and shareholders who do not wish to use their rights can sell them in the market between March 1 and 8. The rights offering will close on March 11.

Wharf's share price gained 0.09% on Friday to HK$53.10. It has fallen 11.2% so far this year, compared with a 1% fall in the Hang Seng Index.

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