Yanlord returns to market seven months after the IPO

The Mainland developer hopes to raise more than twice the IPO proceeds from a combined sale of new shares and convertibles.
China-based property developer Yanlord Land Group is back in the market seven months after its Singapore IPO and this time it has its sights set on quite a bit more money.

An immediate sign of this is that CLSA and HL Bank, which arranged the initial public offering, have been replaced by Goldman Sachs, which will act as sole bookrunner, and Morgan Stanley, which has taken on the role as lead manager.

The company is looking to raise a combined S$650 million ($430 million) from the fully marketed sale of new shares and convertible bonds, or more than twice the S$283.6 million it raised in connection with the June listing.

The timing of the IPO was unfortunate in that it came right at the end of the month-long correction in global equity markets and, to get the deal done, the company was forced to cut the size to only 53% of the original fund raising plan. One company decided to pull its IPO altogether on the day Yanlord fixed its price and the previous day Shui On Land had cancelled its Hong Kong offering because of the poor market environment.

TodayÆs market is obviously entirely different and with YanlordÆs share price having more than doubled since the listing (at S$1.08) to yesterdayÆs close of S$2.23, the company seems confident that investors now recognise its merits and will be willing to buy more shares. The money will be used primarily to expand the companyÆs land bank for future developments, which is likely to be viewed favourably by potential investors.

ôThe stock is quite illiquid with a daily trading volume of only S$5 million so this will be a good opportunity for investors to get in,ö says one observer.

However, the offering is not without risks as the company focuses on the high-end of the residential property market, which is one of the sectors most affected by the Mainland governmentÆs measures to curb speculation and excessive price inflation.

The company operates in selected high-growth cities within the four major economic regions in China û the Yangtze River Delta (including Shanghai and Nanjing), the Pearl River Delta, Western China and the Bohai Rim. Over the past three years it has also started to develop high-grade commercial properties, such as office buildings, retail space and serviced apartments, both for sale and leasing.

People familiar with the offer say Yanlord is planning to sell about S$350 million worth of new shares and S$300 million of convertibles. The bookbuilding period started yesterday and will run until January 31 with the final pricing to be determined on February 2. According to the offering document the combined sale will involve the issuance of up to 324 million new shares.

The new shares, which will account for about 8% of the company post-issue will be priced in reference to the share price of the existing stock. The price fell 4.7% yesterday after the announcement of the fund raising plan û even as the Singapore benchmark index pushed on to a new record high û and given the likelihood that the price will remain under pressure during the bookbuilding it is reasonable to expect that the discount will be ôreasonably tight,ö one source says.

The CBs, meanwhile, are offered to investors with a yield between 4% and 4.5% and a conversion premium ranging from 28% to 33%. The conversion price will be determined with reference to the final price of the new shares. The bonds have a five-year maturity with a put in year three and a zero coupon.

They will also have an issuer call option after three years, which is unconditional. In other words, the issuer can force conversion even if the bonds are trading below 120%-130% of the conversion price, which is typically the norm for call options on CBs.

According to one market participant the pricing will assume a credit spread of 350 basis points, full dividend protection and a 4% borrowing cost. Depending on the final price the bond floor will likely end up around 92%-93% with an implied volatility between 26% and 31%.

As of September 30, the company held properties with a gross floor area of 1.3 million square metres for future developments in addition to 1.47 million sqm GFA of properties under development and 1.7 million sqm GFA of completed properties. In December last year the company also teamed up with an affiliate of GIC Real Estate, which is the real estate investment arm of the Singapore government, to make a joint investment into a residential project in Nanjing. That project could yield a potential GFA of 668,000 sqm, according to company announcements.

Yanlord holds 60% of this joint venture, which may also invest in other projects in China from time to time.

According to the offering document, the company estimates that that its revenues increased by 21.9% and 24.5% in 2006 to at least S$949.1 million ($617 million), and that its net profit grew by 37.9% to 40.6% to at least S$168.5 million ($110 million).

Going forward however, the growth rate could be negatively affected by the Chinese governmentÆs intention to start to enforce the collection of a land appreciation tax in all parts of the country. The company said it has pre-paid this tax at a rate of 1% (of its gross sales proceeds) on apartments and 3% on villas since 2003, except in the Shanghai Pudong New District, where the local authorities didnÆt require pre-payment until October last year.

Yanlord noted that it hasnÆt yet been required to pay the difference between the pre-paid amount and the actual tax, which ranges from 30% to 60% of the appreciated value of the property, and hasnÆt made any provisions to cover such payments.

ôThe more rigorous enforcement of LAT collection by the PRC government would reduce the profitability of our development projects, particularly those that are located in the Shanghai Pudong New District, where we had not previously been subject to LAT,ö the company said.

ôAs we have several projects in the Shanghai Pudong New District under development, or held for future development, and the amount of LAT could be substantial, the impact on our profitability could be material.ö

Yanlord noted that it is still unclear whether the LAT will be levied retrospectively for the Shanghai Pudong New District, but if that turns out to be the case the company may be required to make a provision of up to $70.8 million in its nine-month results to September 2006, meaning these results will have to be revised. The payment of such a tax sum would significantly reduce the cash on hand and adversely affect its ability to fund land acquisitions and execute its business plan, the company warned.

¬ Haymarket Media Limited. All rights reserved.
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