December 15, 2017 / 6:43 AM / 10 months ago

Breakingviews - Sunac lays foundation for better balance sheet

HONG KONG (Reuters Breakingviews) - A chastened Tianjin-based property developer is laying the foundation to build a better balance sheet. Sunac China Holdings plans to raise $1 billion by selling discounted shares. Thanks to a 380 percent rise in the company’s share price over the last 12 months, it’s a good time to tap the market for cash. Given how aggressive Chairman Sun Hongbin has been, though, he probably will need to do so again.

Sunac China Holdings Ltd logo is seen during an exhibition in Hangzhou, Zhejiang province, China, May 25, 2015. Picture taken May 25, 2015. China Daily/via REUTERS

The placement announced on Friday, Sunac’s second this year, proposes to sell new shares at HK$31.10 each. That’s a near-12 percent discount to the undisturbed trading price. Existing public shareholders will be diluted, having their combined stake reduced by 2.8 percentage points to 46 percent.

Pressure on highly-indebted Sunac has intensified since its last share sale at HK$18 apiece earlier this year. Beijing is pushing up interest rates, cracking down on property speculation enabled by shadow banking, and disciplining private companies seen to be making risky acquisitions. Sunac is vulnerable on all three fronts. It relied on credit to rapidly expand its property portfolio, focusing on first-tier cities that have especially attracted the attention of speculators. 

Total liabilities of 391 billion yuan ($59 billion) at the end of the first half of 2017 leave Sunac vulnerable to rises in refinancing costs. Its financing stunt with fellow developer Dalian Wanda during a $9 billion hotel and theme-park deal didn’t go down well either and had to be unwound. In addition, the company sunk over $2 billion into troubled tech startup LeEco.

The question is not really why Sun is tapping markets now, but rather why he hasn’t done so earlier or more often. This latest transaction should help lower Sunac’s proportion of net debt to equity to 285 percent from about 325 percent, according to analyst Toh Zhen Zhou, who publishes on Smartkarma. The company has scope to issue up to 306 million more shares on top of the 252 million in this deal, thanks to a “general mandate” already granted by shareholders. To improve its finances and appease the authorities, it may not be long before it offloads more of them.

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