Chinese property firm China Resources Land sold $1.3 billion worth of shares on Tuesday at the bottom end of the price range as stock markets took a tumble globally, according to people close to the deal.
The sale follows the People’s Bank of China’s announcement on Sunday of its third round of interest rate cuts since November, a move widely expected to be a boost for real estate companies.
Moody's said the PBoC's latest rate cuts are positive for property developers because it will "support property sales and reduce borrowing costs". The ratings agency said those with a focus on the mass market, a high portion of domestic borrowings and reputable brand names will benefit the most.
Over ten banks competed for the right to sell the shares for China Resources Land earlier this week. Some of the bids were quite aggressive given that China Resources Land is one of the largest developers in mainland China and its stock is very liquid. Deutsche Bank won the auction, promising to sell the shares at a 5.7% discount to the shares' close on Monday. BOCI and CICC joined Deutsche Bank in the effort to sell the stock, the people said.
However Deutsche Bank subsequently pulled out of the trade. JP Morgan and Morgan Stanley stepped in to take the German bank's place at a less aggressive price range.
China Resources Land opened the share sale on Tuesday looking to sell 380 million shares in an accelerated bookbuild. The stock was marketed within a price range of HK$25.25 to HK$25.65 per share; a discount of 5.5% to 7.0% to Monday’s closing price, according to a term sheet seen by FinanceAsia.
The market continued to exert pressure on pricing, and when the Hang Seng Index started to slide and European markets slipped lower, the developer's advisers thought it prudent to price at the lower end of the range and sell around 65 million additional shares to ensure the issuer raised the capital it had targeted at a reasonable valuation for investors.
The bookrunners brought in around 200 accounts, a relatively large group, comprising mainly long-only global institutions but also including a strong showing of mainland Chinese names and some arbitrage funds. Most investors were attracted by the fact this is a large and liquid name among its peer group.
The offer was multiple times covered at the low-end of the range even though the sale closed ahead of the US market opening. A few US accounts based in Asia were brought into the book early on Tuesday. The top 20 to 25 accounts made up about half of the book.
Shares in China Resources Land are up by 42% in the past month, tempting the issuer into the market to raise capital. The firm plans to use the proceeds as payment for future acquisitions of land bank, development costs and as general working capital requirements.
China's rate cuts appear to be kicking in. Property sales volumes across China increased following the recent rounds of regulatory loosening. Total contracted gross floor area sold for nine cities increased to 51% year-on-year in April from 11% in March and continued in early May. To be sure, developers’ pricing power remains limited because market inventory remains high and developers with liquidity pressure will continue to offer promotions to stimulate sales.
The developer also reported in March full year 2014 underlying profit up 25% year-on-year to Rmb11,802 million, 3% above consensus mainly due to better than expected top-line booking.
Management indicated it may partner with other developers for acquisitions going forward, in line with the strategy of other large developers.
Another Chinese developer, Agile Property, also took the opportunity to tap capital markets for refinancing purposes on Tuesday. The company priced its latest $500 million five-year note that is callable in year three at a yield of 9.125%, compared with initial guidance of around 9.375%.
The sale represents 5.5% of the enlarged market capitalisation.
After the sale, the seller will be locked up from selling more shares for 90 days.
The stock trades at around a 24% discount to end 2015 NAV versus the sector average of 52%.
