Hong Kong property developer Hang Lung Properties made an opportunistic trade in the Asian equity markets yesterday (November 29) raising HK$4.44 billion ($570 million) from an increased top up placement via Credit Suisse First Boston. The deal appeared incredibly well timed, coming on the back of a big upswing in property stocks and market liquidity.
Where the former is concerned, HLP is up 29% year-to-date, outpacing the Hang Seng Index, currently up a far more modest 12%. It has also come in a week when huge liquidity is building up ahead of big IPO's for Air China and the Link Reit, which have not yet opened their books and sucked money away from other stocks.
However, the underlying momentum has not been enough to save JPMorgan's IPO for steel company China Guofeng and the company pulled back from formal roadshows yesterday. This was despite what seemed like an extremely cheap valuation of just 3.3 to 3.7 times 2005 earnings and a high dividend yield of 7.8% to 8.2%.
Hang Lung's 370 million new share deal was marketed at a fixed price of HK$12, which represented a 6.25% discount to the stock's last trade of HK$12.80 when it was suspended Monday lunch time. The deal was initially sized at 335 million shares, then upsized by 10% to 370 million.
At its final level it represented 11.2% of outstanding share capital, with the Hang Lung group dropping from 57.2% to 51.4%.
The transaction equated to 42 days trading volume and expanded the freefloat by 27.9%. Because it was quite sizeable relative to the latter, the lead was not aggressive with the discount.
Indeed, having agreed to hard underwrite the deal, it had been waiting for a number of days to execute the trade and chose one when there was strong momentum propelling the underlying market. In the morning session, for example, Hang Lung had traded up 1.1%.
Books are said to have closed three-and-a-half times covered with participation by 90 accounts. Of this number, about 5% were new to the Hong Kong property sector and are said to have viewed the price as a good entry point. Six investors placed orders for 10% or more of the deal.
By geography about two thirds of the book went to Asia and one third to Europe. There was also a split of 80% institutions and 20% retail.
The deal comes hard on the heels of a $279 million placement for Hang Lung in September via HSBC. However, the previous offering was an old share deal fed out of HSBC's own proprietary book rather than an example of the majority shareholder cashing out at a high point in the cycle.
Analysts have a neutral to bullish view on the stock, which is trading at a discount to current NAV of about 5% and discount to forward NAV of about 35%.
Some analysts believe Hong Kong is only at the beginning of a sustained upswing in the property sector, which could last a number of years. This belief is founded on the market's underperformance since 1997 when it has traded out of sync with developed market economies and declining interest rates.
Whereas countries like the UK and South Africa have seen house prices rise on average 132% and 181% between 1997 and 2004, Hong Kong house prices dropped more than 50%. During this time HLP built up a very cheap landbank, which is now coming to fruition, with house prices rising more than 30% year-to-date.
In September it reported 2004 results, which showed a 136% spike in net profits to HK$2.065 billion ($265 million). Much of this increase was due to the success of one development, Harbourside by Kowloon Station. So far the company has sold 15% of the development, realizing a development margin of 57%.
Some analysts believe the company's flagship development provides the main near term catalyst for the stock and note that HLP may decide to return some of the cash it generates next year back to shareholders in the form of a special dividend.
However, they also note that HLP will find it difficult to replicate the cheap costs of its current landbank in a rising property market and highlight the risks associated with its plans to diversify further into China.
