Hopson raises $204 million in primary share sale

Chinese property developer Hopson Development on Wednesday placed new shares into the market, raising HK$1.59 billion ($204 million). The placement was launched after an extremely strong week for the stock: in the five days immediately before the transaction, the company's share price was up 28%.

The deal consisted of 120 million primary shares, representing 8.15% of the company, or 7.54% of the share capital as enlarged by the new issuance. The indicative price range was between HK$13.30 and HK$14.03, translating to a 3% to 8% discount to the latest close.

The deal priced at the bottom, HK$13.30 for an 8% discount. Yesterday, the first day of trading after the deal, the shares dropped 9.4%. 

The investors were described as mainly long-only funds, coming mostly from Asia, although there was some demand from the US and Europe. The deal had an unusually long five-day settlement period, which meant investors who participated in the deal cannot sell their new shares until June 11, exposing them to five days of market risk. This discouraged hedge funds from getting involved because they would be unable to immediately flip the stock, said the source. As a result, more shares were sold to investors with a view on the company's long-term future.

In April, when Hopson released its 2008 results, the top-line revenue was in accord with market expectations, while Ebitda came in 17% above the market consensus, according to Bloomberg. And in contrast to its peers, which have shrinking margins, the company's profit margin widened to 45% in 2008 from 40% in 2007.

In the past couple of months, the company's share price has crawled back to the level it was trading at last summer. On the day of the deal it was only 4% lower than the price it traded at on June 3, 2008.

The real boost, however, happened over the past week. On Friday the stock was up 7.8% and on Monday it rocketed 21.2%. Positive data in the form of the May purchasing managers' index (PMI) generally buoyed China stocks, but the best news for Hopson came from a surprise policy move, announced last Friday, relating to the capital requirement for real-estate developers.

China's State Council reduced the capital requirement for the development of ordinary residential homes to 20% from 35%. There was an additional, smaller reduction, bringing the requirement down to 30% for other kinds of property projects. This move surprised analysts because China's property market is considered by many to be recovering already.

The equity requirement was increased to 35% in 2004 to cool down the property market and the new rate brings it back to 1996 levels -- the year the requirement was introduced.

The aim of the move is to encourage property investment rather than increase property prices, according to a research note put out by Royal Bank of Scotland (RBS) on Friday.

The note said that if the change had occurred earlier in the year, the impact would have been less significant as developers were still cautious about buying land for new developments when property prices were still in the dumps.

"However, in view of the recent mild increase in property sales prices and developers' renewed interest in the land market, we believe that it is a timely move by the authorities to stoke the fire and make real estate a stronger contributor to the government's target of 8% GDP growth this year,"  RBS said.

In a statement released on the Hong Kong stock exchange, Hopson did not elaborate on its plans for the new capital, saying simply that the placement was "a good opportunity to broaden the shareholders base and to raise capital for the company for its future business developments."

Since the beginning of the year, the company has been actively building up liquidity through the sale of assets. In February, it sold its 50% equity stake in the Shanghai Hopson International Tower for $40 million. It also has two commercial buildings in Beijing and Guangzhou that are up for sale.

In the past, Hopson has typically enlisted the services of Credit Suisse for its equity capital markets deals, but on this deal, the developer chose Deutsche Bank and UBS as joint placing agents.