Sunac China (01918): 20% discount on shares to “renew life”. Who is the brave “White Knight”?

After getting through the dark, what is the first thing a housing company wants to do?

On this question, the answer given by Financing China (01918) is — allotment financing.

Early in the morning of October 17, Sunac China announced that the company, the seller and the placement agent (i.e. CICC International) had signed a placement and subscription agreement. Based on this, Sunac China plans to place 489 million shares at a price of HK$2.465 per share. The placement price will be discounted by 19.97% from the closing price of the previous trading day, and the total proceeds from the placement transaction will be approximately HK$1.25 billion.

The Hong Kong stock market has always had this kind of issuance system, that is, when stock prices are being hyped up, management can use the previous board of directors reserves and authorizations to issue shares by surprise, raising capital for the company while increasing the amount of shares that can be sold. Previously, this system was mainly used to prevent companies from being viciously acquired.

Generally speaking, allotment of shares can help companies mitigate debt risks and supplement working capital. However, at the same time, allotment of shares will also expand the company's total number of shares, leading to a decrease in net cash flow and profit per share, and also damage the interests of some retail investors. Therefore, after allotment of shares, the stock price will trend downward. If there isn't enough time to make up the increase, the stock price level will be more difficult to maintain.

Therefore, at a time when the market is looking forward to the benefits of the Ministry of Housing and Construction meeting at 10 o'clock, Sunac China's current discount allotment announcement is certainly like a pot of cold water, pouring in a lot of “cool” investment.

On the same day, the domestic housing stock sector fell rapidly in early trading, recording a decline of nearly 7%, then became lower and lower during the session, plummeting 10.25% by the end of the day, making it the sector with the second largest decline on the 17th. In terms of individual stocks, Sunac China plummeted 27.27%, leading the decline, which is different from the previous day's 40% rise. Zhongliang Holdings and Shimao Group all plummeted by more than 20%, while Vanke, Agile, and Longhu followed suit.

(Market source: Futu)

It can be seen from this that the “trumpet” of a sharp rise in the real estate sector due to favorable policies has not been sounded for a few days, and it seems that China's “Yin Eats Rice” distribution intentions have come to an end because of Sunac China's current “Yin Eats Rice” distribution intention.

Of course, the sharp decline in the real estate sector does not rule out the reason for the collective weakening of today's three major indices, but it can be determined that Sunac China's discount placement announcement clearly “added fuel to the fire.”

The scale of debt is high, and financing is only for “life extension”

In fact, Sunac's allotment is nothing new in the industry; only this time it came so suddenly — while the sector was still enjoying a sharp rise the day before, a pot of cold water was poured the next day.

As can be seen from a breakdown of every stock allotment by Sunac, there is no shortage of deep intentions behind every allotment of shares of the company. Some set up “firewalls” to prevent malicious acquisitions, while others obtain financial support to ease financial constraints.

For example, in September 2016, Sunac China placed 453 million shares at a 6.5% premium, with a placement price of HK$618 million per share and raised HK$2.8 billion. This allotment of shares was not intended to ease financial constraints. The final placement shares were all subscribed by Sun Hongbin. The reason was to set up a “firewall” to prevent “barbarians” from invading and being maliciously acquired.

Alternatively, in 2017, Sunac allocated two large shares, the purpose of which was to ease tight cash flow. At the time, Sunac was spending more than 50 billion dollars to acquire 13 Wanda cultural tourism projects twice, creating the “Century M&A” story.

Meanwhile, in January 2020, Sunac placed nearly HK$8 billion of shares, breaking the previous year's domestic housing stock allotment financing record. The purpose of the allotment was also to “reduce debt” and pay for past acquisitions.

However, the main purpose of this allotment of shares financing is also to “reduce debt.” In the announcement, Sunac China stated that this share placement will mainly be used to support the implementation of long-term solutions for domestic corporate bonds and supplement general working capital. The company also believes that the placement and subscription matters will support the better resolution of the Group's domestic open market debt risks, and the mitigation of related debt risks will also be more conducive to the Group's promotion of the completion of the guarantee delivery work and the resumption of operations.

Generally speaking, allotment financing has advantages and disadvantages, and this allotment of shares in Sunac China clearly outweighs the benefits. The 20% discount allotment is almost the biggest discount on the company's allotment price in recent years. This will obviously cause investors to question the company's value and further depress the stock price. Furthermore, under the policy that the industry is about to usher in, this sudden allotment of shares may cause investors to have doubts about the company's business conditions and development prospects, affecting the market's confidence in the company.

However, even so, Sunac China chose to distribute shares at a discount because it is more important to “survive” than the price of a heartbreaking allotment.

In the first half of 2024, the company handed over an interim report card that was not “ideal.” During the period, the company achieved revenue of about 34.28 billion yuan, a decrease of about 41.4% over the same period last year; gross loss was about 1.81 billion yuan, a decrease of about 41.2% compared to the same period last year; losses attributable to company owners were about 14.96 billion yuan, a decrease of about 2.7% compared to the same period last year.

After fully accounting for various depreciations, Sunac China's net assets reached 66.26 billion yuan, of which net assets returned to mother were 47.96 billion yuan. The size of interest-bearing debt fell to 277.43 billion yuan.

More specifically, as of June 30, 2024, Sunac China's current and non-current loans were approximately 193.49 billion yuan and 83.93 billion yuan, respectively, with a cash balance of about 25.68 billion yuan. Among them, the outstanding loan principal amount due at the end of the period was about 106.96 billion yuan, so the total loan principal amount of about 57.44 billion yuan may be required to be repaid early.

To this end, Sunac China can't help but let this wave of policies fly for a few more days. It only wants to quickly allocate shares and raise some money to renew its life.

The “bottom of the policy” is here. How effective is the backbone?

Looking at the development of the real estate industry, before 2016, benefiting from continued policy and price increases, industry demand maintained a double-digit growth rate. However, 2017 began a period of slow development for 5 years, and the growth rate continued to slow, and the Evergrande thunderstorm intensified the industry wash up. The industry experienced frequent thunderstorms in 2022. The industry officially entered a period of recession and entered an era of negative growth. Up to now, it has been declining for three consecutive years.

According to the latest data from the Bureau of Statistics, from January to August 2024, the country achieved a sales area of 610 million square meters of commercial housing, with a cumulative year-on-year ratio of -18.0%. Compared with the cumulative decline in January-July, it is 0.6 pct narrower. Commercial housing sales reached 6.0 trillion yuan, a cumulative year-on-year ratio of -23.6%. Compared with the cumulative decline of 0.7 pct in January-July, the decline in commercial housing sales narrowed significantly.

At the level of the top 100 housing enterprises, according to Kerui data, in January-September, the top 100 housing enterprises achieved sales transaction amount of 2633.82 billion yuan, a year-on-year decrease of 36.6%. The decline was basically the same as in August. On a quarterly basis, the scale of the top 100 housing companies' performance in the first three quarters remained at historically low levels.

(Image source: Fangzheng Securities)

Undoubtedly, at a time when the market is at the “bottom of the market,” the real estate industry urgently needs a wave of “policy backbone” to back it up.

On October 17, the State Information Office held a press conference. Five departments including the Ministry of Housing, Urban-Rural Development and other departments attended to introduce the situation relating to promoting the steady and healthy development of the real estate market. At the conference, at the press conference, Minister of Housing, Urban-Rural Development, Ni Hong said that after three years of continuous adjustments, China's real estate market has begun to bottom out, and it is predicted that the October data will be positive and optimistic.

In response, Ni Hong also gave an overview that the “combo punch” to stop falling and stabilize the real estate market is four cancellations, four reductions, and two increases. The four cancellations give the city government full autonomy in regulation and control. The city government adjusts or abolishes all kinds of restrictive measures on housing purchases in accordance with city policies. It mainly includes lifting purchase restrictions, removing sales restrictions, removing price limits, and abolishing standards for ordinary housing and non-ordinary housing. The four reductions are lowering interest rates on housing provident fund loans; reducing the down payment ratio for housing loans; reducing interest rates on stock loans; and reducing the tax burden of “selling old and buying new” in exchange for housing purchases. Two increases. One is the implementation of an additional 1 million urban village renovation and dilapidated housing renovation through monetized resettlement and other methods. Second, by the end of the year, the credit scale of the “white list” project will be increased to 4 trillion dollars.

Meanwhile, to fluctuate the clock forward, the September 26 Politburo meeting proposed to push the real estate market to stop falling and stabilize. Since then, a series of policies have been introduced, and market feedback has also been quite positive. First-hand housing sales, visits, and contracts have increased markedly, and second-hand housing transactions have continued to rise.

Take the latest sales data as an example. As of October 15, the average daily sales area of new homes in large and medium-sized cities in October 30 was 226,000 square meters. The year-on-year growth rate narrowed sharply from -32.4% in September to -4.5% in the first 15 days. Among them, the improvements in first-tier cities with stronger policies are most obvious. The year-on-year growth rate of new home sales in the first 15 days of October rose to 11.5% from -31.6% in September, and the growth rate of new home sales in third-tier cities also changed from negative to positive.

As can be seen, the initial effects of this round of real estate policies have been reflected, but at present, there are still quite a few problems with real estate fundamentals that need to be solved. Haitong Securities said that, on the one hand, there is still downward pressure on housing prices. The current increase in volume, or more, is “price in exchange for volume.” On the other hand, inventory is still high, and the removal cycle is still long. This means that housing enterprises are still at greater risk, and real estate as a whole is still a drag on the economy. This is probably also the main reason why this conference once again strengthened real estate policy.

epilogue

In summary, although Sunac China suddenly allocates shares at a discounted price at a time when policies are warming up, harming the interests of retail investors, there is quite a suspicion that they are ignoring martial arts. However, from an enterprise perspective, Sunac China's discounted share allocation is also aimed at mitigating the company's liquidity crisis and resolving the urgent need for debt tension.

What is curious, however, is which “White Knight” actually took a stake in Sunac China. After all, under the dual influence of constant thunderstorms in the external industry and the lingering liquidity crisis of domestic companies, investing in and financing China's capital can also be considered a “warrior.”