Sunac China Holdings has taken advantage of its skyrocketing share price to execute a HK$4 billion ($516 million) top-up placement that has raised much-needed capital to reduce its leverage after a series of high-profile acquisitions that have greatly expanded its landbank.
The Tianjin-headquartered property developer sold 220 million shares overnight on Monday and was met with decent demand topping $1 billion according to sources familiar with the situation.
The strong uptick in Sunac’s share price meant the deal needed a relatively deep discount range of 5% to 8.8% to the stock’s HK$20.1 close, equivalent to HK$18.33 to HK$19.10 per share. The deal equated to 5.6% of Sunac’s existing share capital.
The final issue price was settled at the lowest end of the guidance at HK$18.33, or an 8.8% discount.
Sources said more than 40 accounts participated, with about half of the deal allocated to the top five accounts.
On Tuesday, the deal closed marginally above its placement price at HK$18.60 per share, suggesting the leads had judged it about right.
Sunac and its chairman, Sun Hongbin, should also be happy with the result given the placement came on the back of a roughly 200% surge in its share price. Year-to-Tuesday’s close, the stock is up 188% and 284.83% on a one-year basis.
The stock is trading at a big premium to its historical average over the past five years. Based on CIMB's estimates, Sunac is now valued at a 16.2% premium to net asset value (NAV) compared to a 46% discount over the past five-years.
Sunac has specified use of proceeds for general corporate purposes on the deal’s term sheet. But it is clear the property developer raised equity capital to reduce its Rmb113 billion ($16.7 billion) debt load (as of the end 2016).
That amount is likely to be much bigger now that Sunac has agreed to purchase the tourism assets of Dalian Wanda Group for $6.5 billion, a move that confirms the property developer’s intention to diversify away from its core residential property business.
The deal itself was partially the result of Wanda’s own desire (or government diktat) to reduce its own debt level. In some respects, Sunac has inherited the cash flow risk of managing the newly acquired 13 theme parks, which will add to its already heavy debt burden.
Sunac was already one of the most heavily indebted Chinese property developers before the Wanda deal, with a debt to equity ratio of 318% at the end of 2016. It has risen by four consecutive years and stands at more than three times Wanda’s 102% as of the end of last year.
To a large extent, Sunac’s debt was accumulated from its big-ticket acquisitions. Last year, the company made a surprising move to invest $2.2 billion into LeEco, the financially embattled technology company behind steaming video operator Letv.
In 2014, Sunac paid $2.5 billion to buyout its 50/50 joint venture with Greentown China, several months after the company failed to purchase a 24.3% direct stake in the Hangzhou-headquartered property developer.
That was a year before Sunac dropped a $1.2 billion bid for cash-strapped property developer Kaisa Group Holdings, the first Chinese real estate company to default on its offshore debt.
Sunac appears to have developed a habit of buying distressed assets. However, the company “understands the importance of cash flow and will put the company’s financial stability as it top priority,” chairman Sun said in a web blog after the Wanda deal.
Industry sources said there could be more share placements from Chinese property developers during the remainder of the year given the National Development and Reform Commission has banned them from issuing offshore debt.
The suspension was issued in May in the face of rising leverage across the Chinese property sector as a whole.
Joint bookrunners for Sunac’s placement were Citi and Morgan Stanley.
