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Shimao's Unit Taps A Jittery Capital Market In A Surprise Plea For Funds, Sending Nervous Investors Heading For The Exit

Shimao Services Holdings plans to issue HK$3.11 billion of convertible bonds and sell 115 million new shares to raise a combined HK$1.74 billion Shares of the company, spun off less than a year ago, tumbled by as much as 13.1 per cent, in their biggest intraday percentage plunge in a month

Shimao's Unit Taps A Jittery Capital Market In A Surprise Plea For Funds, Sending Nervous Investors Heading For The Exit

Shimao Services Holdings, the management unit of one of China's largest property developers, is tapping the capital market for funds, a plan that surprised investors who are already jittery over the financial state of China's indebted developers, causing its shares to tumble.

Shimao plans to issue HK$3.11 billion of convertible bonds at a conversion price of HK$18.22 per share, and sell 115 million shares at HK$15.18 to raise a combined HK$4.86 billion (US$624 million), according to two filings to the Hong Kong stock exchange on Wednesday.

Shares of Shimao Services, which said it intends to use the net proceeds raised for "potential mergers and acquisitions, business expansion, working capital and general corporate uses," tumbled by as much as 13 per cent, their biggest intraday percentage plunge in a month.

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The fundraising plan of the company, chaired by the company founder's son Jason Hui Sai-tan, comes at a jittery time for China's real estate industry amid a record spate of defaults, as heavily leveraged borrowers like China Evergrande Group, Guangzhou R&F Properties grapple with raising capital to repay their financial obligations. R&F had to sell three assets to a unit of Country Garden Holdings for 10 billion yuan last month to repay its borrowings.

Jason Hui Sai-tan, chairman of Shimao Services Holdings and the son of the Shimao Group's founder, during an interview in Hong Kong's Admiralty on 26 March 2019. Photo: Winson Wong

Jason Hui Sai-tan, chairman of Shimao Services Holdings and the son of the Shimao Group's founder, during an interview in Hong Kong's Admiralty on 26 March 2019. Photo: Winson Wong

"We find the timing and valuation of these surprise fundraising [plans] difficult to justify, given the company's rich cash balance and the recovering market sentiment in the sector," Jefferies' analyst Stephen Cheung wrote in a research note. "This, together with its 5.6 billion yuan cash balance in the first half of this year, drives our concerns on the asset quality of the potential acquirees, and whether there are other non-fundamental considerations for this somewhat hurried fundraising amid the recovering sentiment on the sector."

The escalating debt crisis at Evergrande and other developers undermined consumers' confidence in buying homes, exacerbating the effect of tight curbs on property developers' financing and property sale restrictions to cap prices. China's price index for new homes fell in September, the first monthly contraction in more than six years, as the array of market-cooling measures since late 2016 finally showed their effect.

Sources: Northeast Securities, Tianfeng Securities, company reports, SCMP Graphics

Sources: Northeast Securities, Tianfeng Securities, company reports, SCMP Graphics

The combined sales of China's top 100 developers plummeted 36 per cent year-on-year in September, according to a supplemental report on China's gross domestic product released by the National Bureau of Statistics on Tuesday.

Shimao Services, which manages 146.1 million square metres (1.57 billion square feet) of property under management in more than 100 cities, was spun off from its parent Shimao Group in October 2020, raising HK$10.07 billion in an initial public offering.

"Assuming a 10 per cent lower sales delivery by their parents, the property management companies' net profits for 2022 and 2023 would be lowered by 4.5 per cent and 5.6 per cent on average, respectively," CGS-CIMB Securities' head of China and Hong Kong research Raymond Cheng wrote in a report.

The slump in Shimao Services shares offer investors the opportunity to buy shares in the open market for a cheaper price than the bond conversion price of HK$18.22, or the share placement price of HK$15.18.

The one-year convertible bond, due to mature in May 2022 with a coupon rate of 2.25 per cent per annum, said Shimao Services. Each bondholder has the right to convert the bonds into shares on or after December 13, 2021. Assuming full conversion of the bonds, it will be convertible into 170.7 million shares, representing approximately 7.22 per cent of the issued share capital of Shimao Services as at the date on October 20.

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