Ying Li sells new shares to fund Chongqing development

The Singapore-listed Chinese developer raises $111 million, while K-Reit Asia pockets $444 million from a rights issue that was oversubscribed despite a tight discount.

Ying Li International Real Estate, a Chinese property developer listed in Singapore, has raised S$154 million ($111 million) from a top-up placement of new shares that it will primarily put to work in a new integrated development project in Chongqing.

Aside from raising capital, the placement had the dual purpose of attracting more institutional shareholders. Ying Li never did an initial public offering as it obtained its listing through a reverse takeover in July last year and until now has been largely overlooked by the broader investment community.

The timing of the placement was well planned to take advantage of the current excitement surrounding the property development industry in Chongqing -- the most populous of China's four provincial-level municipalities and the only one to be located in the western part of the country -- that has been generated by a couple of Hong Kong initial public offerings by property developers active in that area. Longfor Properties is due to start trading today after raising $912 million in a well-received offering that was priced at a higher valuation than any of the other property IPO in the past two months, and yesterday, Fantasia Holdings Group priced its IPO near the top of the range to raise a total of $408 million (see separate story on our website today).

Contrary to Longfor and Fantasia, which also operate in other areas in China, Ying Li is a pure-play Chongqing developer with a 15-year track record as a developer of commercial properties in this area. It specialises in urban renewal projects and standalone commercial buildings that modernise the landscape in Chongqing's urban districts.

The Da Ping project, which will be partly funded by the placement proceeds, has a planned gross floor area of about 4 million square feet, including 2 million square feet of high-end residential units, top-end retailers and potentially a high-end hotel or a serviced residence operator. Ying Li acquired the site in September and expects the project to be fully completed by the end of June 2013.

The placement, which was completed late Tuesday, comprised 253.2 million new shares, which equalled approximately 15% of the existing share capital or nine days worth of trading volumes, based on the daily average over the past month. The shares were offered at a price between S$0.61 and S$0.64, which implied a discount of 9.9% to 14.1% versus the closing price of S$0.71 in Tuesday's morning session. The shares were suspended from trading in the afternoon as the transaction was being marketed.

A wide discount was deemed to be necessary since most investors were not familiar with the name, which according to Bloomberg is covered by only four local brokerages. However, J.P. Morgan, which acted as the sole bookrunner, has been briefing potential investors for a couple of months already and the deal was well-received with orders from a range of long-only funds, hedge funds and private wealth investors. Most of the orders came from Asia-based accounts, although there was also some demand from Europe.

The demand was sufficient to price at the mid-point, but the price was eventually fixed at the bottom of the range at S$0.61 for the maximum 14.1% discount as the company was prioritising getting "the right kind" of investors. According to a source, the allocation was skewed towards long-only funds and the top 10 allocations took about 70% of the deal. About one-third to one-half of that was sold to anchor investors and many of the 35 or so buyers were new to the company.

Fang Ming, Ying Li's chairman and CEO, said he was delighted with the success of the placement, which he saw as testament to the company's track record and growth potential.

"With the funds raised from the placement, Ying Li will be able to push ahead with our Da Ping property development and pursue our growth strategies to leverage on the growth potential of Chongqing," he said. "Available landbank in prime locations in Chongqing is in short supply and the funds from this placement will enable us to potentially acquire these sites to add to our portfolio of strategically located development sites and properties."

According to the placement information statement, about 81% of the proceeds will go towards the Da Ping project, while 14% will be earmarked for future land acquisitions and general working capital. The remaining 5% will cover the expenses related to the deal, including a 3% fee payable to J.P. Morgan and DBS (a joint placement agent) for underwriting and distributing the shares.

Not surprisingly, given the large discount, the share price slumped when the stock resumed trading yesterday. However, it never fell below the placement price and closed 1 cent above it at S$0.62.

Separately, K-Reit Asia, a Singapore-listed real estate investment trust focusing on commercial buildings, has announced that its S$620 million ($444 million) one-for-one rights offering was oversubscribed. According to a filing to the Singapore Exchange, the offering was 110.6% covered when including applications for excess units and 98.6% covered if counting only the valid acceptances from holders of the rights.

The K-Reit deal, which was announced on September 30, is setting a new benchmark for rights issues in Singapore in terms of pricing, having got away with a much tighter discount than any of the other rights offerings this year. The offer price of S$0.93 per unit translated into a 21.2% discount to the closing price just before the deal was announced and an even tighter 11.8% discount versus the theoretical ex-rights price (Terp) of S$1.06. Early this year, rights offerings were routinely offered at a 30%-35% discount to Terp, although the more recent deals had seen the discount creep down into the high-20s.

A source noted at the time of launch that the tighter discount will make it easier for K-Reit to use the funds for accretive acquisitions, which will be positive for its existing unitholders. The break from the "normal" pricing parameters that have been used by other issuers was a bit of a gamble for BNP Paribas, which was the lead manager for the offering, although the bank did have good support from Keppel Corporation and Keppel Land, which together own 75.8% of K-Reit, and which had agreed to take up their full entitlements. Still, BNP underwrote the remaining 24.2%.

But the gamble paid off and K-Reit's unit price never fell below the rights issue price. However, it has been trading below Terp during the offer period and yesterday closed at S$1.02, down 13.6% from just before the rights issue was announced.

About 80.8% of the gross proceeds will be used to repay borrowings, and as a result of the deal, K-Reit's aggregate leverage will drop to about 9% from 33%. This will improve its implied funding capacity to S$647.8 million from S$438 million (based on an assumed maximum leverage of 30%-40%) and therefore its ability to make more acquisitions. K-Reit currently has five commercial properties in its portfolio, which is valued at S$2.1 billion ($1.5 billion).

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