Property plays are weak. Concerns about the lack of liquidity among developers is a key factor contributing to that weakness.
Shortly after top developer Evergrande issued offshore bonds with a coupon exceeding 13 percent last week, Guangzhou R&F Properties (02777.HK) is planning to raise more than HK$8 billion by issuing new shares.
After focusing on Guangzhou, R&F started expanding nationwide in 2002. It posted sales revenue of 95.7 billion yuan (US$13.83 billion) in the first 10 months of this year, up 45 percent from the same period last year.
R&F is ranked the country’s 15th largest developer and considered one of the fastest growing second-tier player in the sector.
Share prices of mainland property counters have seen a year-to-date decline of more than 30 percent. R&F saw its shares drop 45 percent from its peak this year.
Considering the weak investor sentiment toward property plays, the timing doesn’t seem to be right for a company to issue new shares these days. A share placement, therefore, reflects an urgent need for the company to raise fresh capital.
R&F said the share issuance is aimed at mitigating risks resulting from macroeconomic fluctuations, strengthening its finances and improving its credit rating outlook.
Yet it might have something to do with an acquisition deal the company did earlier.
Last year R&F snapped up 77 hotels from Dalian Wanda Group for 19.9 billion yuan. Wanda boss Wang Jianlin told his staff in an internal gathering that poor returns and the drain on cash flows are key factors behind his decision to sell the assets.
Commercial and tourism activities in third- and fourth-tier mainland cities, where most of the hotels are located, may not be adequate to support the high operating costs of those facilities at the moment.
The hotels might have good long-term potentials, and they were acquired at a relatively cheap price. But given the current economic slowdown and uncertainties presented by the raging US-China trade war, it may take R&F longer than expected to see an improvement of the situation.
The company’s already high gearing does not help. Its net debt ratio stood at 190 percent at the end of June, among the highest in the sector.
This article appeared in the Hong Kong Economic Journal on Nov 6
Translation by Julie Zhu
[Chinese version 中文版]
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