Temasek seeks to sell entire stake in Kaisa

An investment company wholly owned by Temasek last night sought to sell its entire stake in Chinese property developer Kaisa Group Holdings, taking advantage of a more than doubling in the share price during the past six months.

As of early this morning, the deal was still open, but sources said it was poised to price at the bottom of the offering range since that was where a number of large US orders were coming in. This should allow the Singapore investment company to raise HK$1.19 billion ($153 million).

Temasek first invested in Kaisa in November 2007, two years before the company went public, as part of a group of seven investors that also included Carlyle. It hasn’t sold any shares since then, and while the Hong Kong stock exchange website suggested that its holdings were slightly larger than last night’s sale, investors were told that the transaction represented Temasek’s entire stake. The shares were owned through a company called Baytree Investments. 

The deal comprised approximately 393.4 million shares, which correspond to 8% of the company and about 30 days’ worth of trading, based on the daily average volume during the past month. The shares were offered at a price between HK$3.02 and HK$3.12 apiece, which translates into a discount of 8% to 10.9% versus yesterday’s closing price of HK$3.39.

The discount looks generous, but the share price has rallied 14.5% in the past seven sessions alone so investors may have needed a bit of an incentive. Hence it is probably not a huge surprise that the deal is expected to price at the bottom for the maximum 10.9% discount. About half the orders are said to contain price limits.

The deal was launched after the Hong Kong market closed and was kept open throughout the US trading day as US investors were supposedly asking for more time to consider the transaction. According to a source, US accounts would likely account for about 30% of the demand, compared with 60% from Asia and 10% from Europe. The deal was said to be oversubscribed with about half the demand coming from hedge funds.

By keeping the books open during the US trading day, Bank of America Merrill Lynch as the sole bookrunner had to deal with the additional challenge of a falling US market, which likely contributed to the downward pressure on the price.

The Dow Jones index fell 1% and the S&P 500 lost 1.1%, as slumping oil and metals prices put an end to a three-day rally in US equities. Chinese online dating agency Jiayuan.com International, which debuted on Nasdaq last night after raising $78.1 million, fell 4.4% to $10.52. The tentative first day was a further confirmation that US investors’ love affair with Chinese internet stocks may be waning. Since jumping 28.6% on its first day of trading on May 4, Chinese social networking site Renren.com has fallen 25% and on Wednesday closed below the $14 IPO price at $13.49.

Hong Kong-listed Kaisa is up about 125% since the beginning of November when stronger-than-expected pre-sales became the trigger for a turnaround in sentiment, and it is currently trading at a 52-week high. However, even with these gains, the share price is still slightly below the IPO price of HK$3.45, which is a clear reflection of the challenges that faced the Chinese property sector in 2010 as the government issued a series of measures to curb property speculation and also curtail lending for land acquisitions, especially for second- and third-tier developers like Kaisa.

This has prompted property developers to seek funds by other means. Shenzhen-based Kaisa raised $350 million from the sale of 13.5% five-year bonds in April last year and then in early December sold $225 million of renminbi-denominated, US-dollar settled, five-put-three CBs with an 8% coupon and 20% premium.

This has enabled the company to be quite aggressive in terms of acquiring new sites as part of its strategy to achieve geographical diversification and a nationwide presence in second- and third-tier cities. As at December 31, 2010, Kaisa had a total of 47 projects in 17 cities in China and a landbank with total planned gross floor area of approximately 20 million square meters, which is sufficient to meet its development needs in the next five years.

The company focuses on urban developments, including large-scale residential properties and integrated commercial properties in the Pearl River Delta, Shanghai and Jiangyin in the Yangtze River Delta region, Chengdu in the Chengdu-Chongqing region and Changsha in central China.

In early March, the company announced that its net profit jumped 564% in 2010 to Rmb3.64 billion ($560 million) on the back of a 66% improvement in revenues, which gave the share price another push upwards. Even when excluding the change in fair value of investment properties, the core net profit was up 240% to Rmb1.41 billion.