Despite brisk sales and expectations of strong cash inflows, numerous Chinese property developers have recently decided to raise fresh funds through share placements.
Five recent deals involving four companies share two common features — new shares were offered at a discount to market prices and the sum raised was rather small.
Zhong An Real Estate (00672.HK), China New City Commercial Development (01321.HK), Sunac China (01918.HK) and CIFI Holdings (00884.HK) are the four property firms that have announced share placements plans. Average size of the placements is only 5 percent of the enlarged capital.
For example, Sunac China and CIFI Holdings set this year’s sales targets at 300 billion yuan and 80 billion yuan, respectively. Therefore, the funds raised through share placements represented 1 percent and 3 percent of their respective sales target for this year.
The truth is, although the funds raised are not that large, it is enough to lower the gearing quite effectively.
Mainland authorities have expressed serious concerns about corporate leverage lately, and have urged companies to use more equity financing and reduce borrowings.
In the real estate sector, aggressively taking out loans has been a common practice, and hence the call for the property players to respond to the government deleverage request.
Sunac China had a net debt of 43 billion yuan as of the end of last year, and its net debt ratio hit a record 121.5 percent.
After raising HK$4.42 billion from a share placement , its net debt to equity ratio could drop by 30 basis points, which is a key financial gauge monitored by credit agencies and creditors.
Investors, meanwhile, may not be happy about such placements as they would be dilutive.
This article appeared in the Hong Kong Economic Journal on Jul 31
Translation by Julie Zhu
[Chinese version 中文版]
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