CIFI Holdings defied tumbling markets in Hong Kong on Monday and raised $170.3 million in a top-up placement.
The mainland real estate developer launched the follow-on offering midday on May 18 after it announced plans to form a joint venture with Hongkong Land China Holdings to develop a property project in Shanghai.
Some 500 million primary shares were on offer at an indicative price range between HK$2.175 and HK$2.350 per unit, a 6% to 13% discount to the May 15 close of HK$2.50, according to a term sheet. Citi, Credit Suisse and Haitong International were joint bookrunners. All three, along with Nomura, were joint placement agents.
The deal launched as markets experienced a pullback on Monday following a blistering couple of weeks after the Easter holidays. Sell-down volumes in Hong Kong hit an all time high of $3.6 billion in April, according to Dealogic data, as investors, namely private equity firms, took advantage of the run up in stock markets to offload stakes in Chinese companies, such as Hony Capital’s $1.26 billion sale of its 23% stake in CSPC Pharmaceutical on April 16; and US private equity firm Carlyle’s $425 million decision to cash in on a near-four year investment in Haier Electronics Group on April 15.
However, markets have retreated somewhat in recent weeks. Hong Kong’s Hang Seng Index is down 2.99% from April 28 up to May 18, while Shanghai Stock Exchange Composite Index dropped 4.31% in the same time frame.
On Monday the Hang Seng Index dropped 0.72%, closing the day at 27,591.25. Real estate stocks notably experienced a sharp decline, dropping 1.08% on the 18 after a sharp run-up this year.
Potential investors face the difficult task of deciding whether the recent bull market in China and Hong Kong is experiencing a temporary pullback or has run its course. Most seem to agree that the former is more likely, at least for now. “At some stage, the music stops. But it doesn’t look like that will happen anytime soon,” one ECM banker told FinanceAsia.
Sources close to the deal acknowledged that investors have very clear-cut views on CIFI Holdings, a property developer that focuses on residential, office and commercial properties in first- and second-tier cities in China.
“We knew investors either liked it or didn’t,” one source close to the deal said. “And obviously today markets were challenging.”
Despite the market headwinds, books were covered a few hours after the deal launched, closing by 6pm Hong Kong time Monday evening. Allocations were still being sorted Monday night, but the source noted that the book was primarily made up of long-only institutional investors and funds in China and Hong Kong. “The quality of the book is excellent,” he said. “The investors who want to be in [the company] are well-known names, mostly around Hong Kong and China.”
Shares priced at HK$2.20 per unit early Tuesday morning, towards the bottom half of the indicative price range, allowing the issuer to raise $170.3 million from the share sale. The deal was upsized from 500 million shares initially to 600 million shares on the back of strong demand, the source said.
Over 80 investors participated in the deal.
Shares in CIFI Holdings, which has a market capitalisation of around $2 billion, have returned 90.84% since its November 2012 initial public offering.
This coupled with strong sales numbers and the company’s involvement in a number of projects in top-tier cities resonated with investors.
“The people who rolled up their sleeves and did the [research] on the company liked it,” said the source close to the deal.
Full-year contracted sales in 2014 totalled Rmb21.2 billion ($3.42 billion), a 38% increase over 2013, while revenues increased by 36% year-on-year to Rmb16.2 billion.
Aanalysts argue there is still plenty of room for upside.
CIFI Holdings has acquired ten new projects in major municipalities like Beijing and Shanghai, and top-tier cities such as Nanjing and Suzhou -- projects that should help boost the company’s sales by 25% to Rmb26.7 billion in 2015 and by 16% to Rmb30 billion in 2016, according to Nomura research.
“Amid consolidation, we see the big developers maintaining around 10% year-on-year property sales growth in 2015 versus flat growth for the broader sector,” Nomura analysts said. “We believe that policy and credit will remain supportive and that balance sheets will improve with slower growth targets.”
CIFI Holdings has also improved its capital structure, which has led to S&P 500 and Moody’s upgrades of its credit rating to BB-/Bb2 with a stable outlook. “We believe these actions should enhance CIFI’s debt structure and hence reduce its current 8.3% financing cost further in 2015,” Nomura research said.
JV
Proceeds from the top-up placement will go towards forming the joint venture with Hongkong Land.
The JV will develop a large-scale prime mixed-use property project in Lujiazui in the Pudong New District of Shanghai, according to the CIFI Holdings statement. Hongkong Land China, a wholly-owned subsidiary of Hongkong Land Holdings, and CIFI Holdings will own the Shanghai Lujiazui project via the offshore joint venture entity on a 50/50 basis, and will jointly manage and oversee the project.
Hongkong Land owns and manages a portfolio of office and luxury retail properties in Hong Kong, Singapore and China.
Mainland property outlook
Chinese property developers in general are tapping capital markets for cash as the government continues to move to support the slowing property industry. The central government on May 10 dropped interest rates for the third time in six months. China also lowered the down-payment requirements for some home owners.
For example, local governments in the Shanxi and Henan provinces lowered the down-payment ratios for first-homes to 20% from 30% previously, an effort to encourage low- and middle-income residents into the markets, notes Bank of America Merrill Lynch research dated May 18.
April’s home sales growth returned to positive territory for the first time since December 2013, following the slew of easing measures introduced by the government to support the weak housing markets, the BofA Merrill research noted citing the National Bureau of Statistics (NBS) data.
“We believe the continued monetary easing, with potentially more RRR [reserve requirement ratio] and rate cuts to come, could help drive further volume recovery in the housing market,” BofA Merrill research said. “Both home prices and home sales volume growth showed marked recover after rate cuts in the past. Moreover, there are signs of improvements in the mortgage conditions for both first- and second-homes following recent easing measures.”
As the government continues to take such initiatives, property developers are seeking to take advantage of the favourable conditions to raise capital and purchase more land, given the cost of land will likely increase in the future. Last week, Greenland Hong Kong raised $219 million from a secondary share sale.
