Sunac China: 20% discount on rights issue to "extend life", who is the brave "white knight"?

After surviving the darkest moment, what is the first thing that real estate companies want to do?

Regarding this question, Sunac China (01918) provided an answer - rights issue financing.

Early on October 17th, Sunac China announced that the company, the seller, and the placing agent (namely CICC) entered into a placing and subscription agreement. According to this, Sunac China plans to issue 489 million shares at a price of HKD 2.465 per share, with a discount of 19.97% compared to the closing price of the previous trading day, raising a total amount of approximately HKD 1.205 billion from the placing.

In the Hong Kong stock market, there has always been an issuance system where when the stock price is speculated, the management can use the previously authorized board to issue shares aggressively to raise funds for the company while increasing the available shares. Previously, this system was mainly used to prevent hostile takeovers.

Generally, rights issue can help companies mitigate debt risks and supplement working capital. However, rights issue will also increase the total number of company shares, leading to a decrease in net cash flow per share, earnings per share, and may harm the interests of some retail investors. Therefore, after the rights issue, the stock price tends to decline. Without sufficient time for recovery, it is even more difficult to maintain the stock price level.

Therefore, just when the market is eagerly anticipating the positive news from the Ministry of Housing and Urban-Rural Development at 10 o'clock, Sunac China's announcement of the discounted rights issue undoubtedly poured cold water on the speculative funds.

On that day, the real estate sector plummeted in the morning session, recording a nearly 7% decline, and then continued to decline in the afternoon session, closing with a sharp drop of 10.25%, becoming the second largest decliner on the 17th. In terms of individual stocks, Sunac China plummeted by 27.27%, leading the decline, a stark contrast to the 40% increase the day before, while China SCE Group, Shimao Group both fell by more than 20%, Vanke, Agile Group, Longfor all followed with significant declines.

(Market data source: Futu)

It can be seen that just a few days after the real estate sector surged due to favorable policies, it seems to have quieted down due to Sunac China's "eating the future" intention with this discounted placement.

Of course, the sharp decline in the real estate sector today may also be due to the collective weakness of the three major indices, but it is certain that Sunac China's announcement of the discounted rights issue has undoubtedly added fuel to the fire.

High Debt Levels, Financing Only for "Survival"

In fact, rights issues by Sunac are not new in the industry, but this time it came so suddenly - the day before the sector was still celebrating the surge, and the next day it poured cold water.

Looking back at each rights issue by Sunac, it is clear that behind each rights issue of the company, there is always a deeper meaning, some are to set up a "firewall" to prevent hostile takeovers, and some are to obtain financial support to alleviate financial stress.

For example, in September 2016, Sunac China issued 453 million shares at a premium of 6.55%, with a subscription price of HKD 6.18 per share, raising HKD 2.8 billion. This rights issue was not to alleviate financial stress, as all the shares were eventually subscribed by Sun Hongbin, but rather to set up a "firewall" to prevent hostile takeoversAlternatively, in 2017, Sunac carried out two large rights issues to alleviate cash flow pressure. At that time, Sunac spent over 50 billion RMB on two acquisitions of 13 Wanda cultural tourism projects, setting off the "mega merger of the century."

In January 2020, Sunac raised nearly 8 billion HKD through a stock placement, breaking the previous year's record for real estate stocks' rights issue financing. The purpose of the rights issue was also to "reduce debt" and cover the costs of past acquisitions.

The main purpose of Sunac China's recent rights issue financing is also to "reduce debt." In the announcement, Sunac China stated that the proceeds from this share placement will mainly be used to support the long-term solution of domestic corporate debt and supplement general operating funds. The company also believes that the share placement and subscription will help better resolve the domestic public market debt risks of the group, which will in turn facilitate the completion of delivery work and business recovery.

Generally, rights issue financing has its pros and cons, and Sunac China's rights issue this time is clearly more disadvantageous than advantageous. The 20% discount on the rights issue is almost the largest discount in the company's rights issue prices in recent years, which will undoubtedly raise investors' doubts about the company's value and further depress the stock price. Additionally, as the industry is about to reach a policy bottom, this sudden rights issue may lead investors to question the company's operating conditions and future prospects, affecting market confidence in the company.

Nevertheless, despite these challenges, Sunac China still chose to issue discounted rights shares because, more importantly than the painful price of the rights issue, is to "survive."

In the first half of 2024, the company presented a midterm report that was not "ideal." During the period, the company achieved revenue of approximately 34.28 billion RMB, a decrease of about 41.4% compared to the same period last year; a gross loss of about 1.81 billion RMB, a decrease of about 41.2% compared to the same period last year; and a net loss attributable to owners of the company of about 14.96 billion RMB, a decrease of about 2.7% compared to the same period last year.

After fully recognizing various impairments, Sunac China's net assets reached 66.26 billion RMB, with attributable net assets of 47.96 billion RMB. Interest-bearing debt decreased to 277.43 billion RMB.

Looking more specifically, as of June 30, 2024, Sunac China's current and non-current borrowings were approximately 193.49 billion RMB and 83.93 billion RMB, respectively, with a cash balance of about 25.68 billion RMB. Among them, the principal of loans not yet repaid at the end of the period was about 106.96 billion RMB, leading to a total principal of loans of about 57.44 billion RMB that may be required to be repaid early.

Therefore, Sunac China is not concerned about letting this wave of policy benefits last a few more days, but is solely focused on quickly issuing rights shares to raise funds and survive.

How Effective is the "Policy Bottom" Support?

Looking at the development of the real estate industry, before 2016, benefiting from policies and continuous price increases, industry demand maintained double-digit growth. However, starting in 2017, the industry entered a slow development period lasting for 5 years, with growth continuing to slow down. The Evergrande default event intensified industry consolidation. In 2022, the industry faced frequent defaults, officially entering a period of decline and negative growth, with three consecutive years of decline.

According to the latest statistics released by the National Bureau of Statistics, from January to August 2024, the national sales area of commercial housing reached 610 million square meters, with a cumulative year-on-year decrease of 18.0%, narrowing by 0.6 percentage points compared to the cumulative decline from January to JulyAchieving a total sales volume of 6 trillion yuan for commercial housing, with a cumulative year-on-year decrease of 23.6%, narrowing by 0.7 percentage points compared to January-July, and a significant reduction in the decline of commercial housing sales.

At the level of the top 100 real estate enterprises, according to data from CRIC, the top 100 real estate enterprises achieved a total sales turnover of 2.6382 trillion yuan from January to September, a year-on-year decrease of 36.6%, with the decline remaining basically flat compared to August. Looking at the quarterly performance, the performance scale of the top 100 real estate enterprises in the first three quarters remained at historically low levels.

(Image Source: Fangzheng Securities)

Undoubtedly, at a time when the market is at the "market bottom," the real estate industry urgently needs a wave of "policy bottom" to provide support.

On October 17th, the State Council Information Office held a press conference with the Ministry of Housing and Urban-Rural Development and four other departments in attendance, to introduce the relevant situation of promoting the stable and healthy development of the real estate market. At the meeting, Minister of Housing and Urban-Rural Development Ni Hong stated that after three years of continuous adjustments, the Chinese real estate market has begun to stabilize, and it is anticipated that the data for October will be positive and optimistic.

In response, Ni Hong also outlined that the "combination punch" to promote the stabilization of the real estate market includes four cancellations, four reductions, and two increases. The four cancellations involve granting full autonomy to city governments for regulation, with city governments implementing tailored policies to adjust or cancel various restrictive measures on home purchases. This mainly includes canceling purchase restrictions, sales restrictions, price restrictions, and standards for ordinary and non-ordinary residential properties. The four reductions include reducing the interest rates on housing provident fund loans, reducing the down payment ratio for housing loans, reducing the interest rates on existing loans, and reducing the tax burden on the purchase of new homes through the sale of old ones. The two increases are to add 1 million sets of urban village renovations and dilapidated house renovations through monetization, and to increase the credit scale of "white-listed" projects to 4 trillion yuan by the end of the year.

Moving the clock forward, the Central Political Bureau meeting on September 26th proposed to promote the stabilization of the real estate market. Subsequently, a series of policies were introduced one after another, with market feedback being relatively positive, showing significant increases in first-hand house viewings, visits, and signings, as well as a continuous rise in second-hand house transactions.

Taking the latest sales data as an example, as of October 15th, the daily average sales area of new houses in the 30 major cities was 226,000 square meters, with the year-on-year growth rate for the first 15 days narrowing significantly from -32.4% in September to -4.5%. The improvement was most pronounced in first-tier cities where the year-on-year growth rate of new house sales for the first 15 days of October increased from -31.6% in September to 11.5%, and the growth rate of new house sales in third-tier cities also turned positive from negative.

It can be seen that the initial effects of this round of real estate policies have been reflected, but there are still many issues in the real estate fundamentals that need to be addressed. Haitong Securities stated that on one hand, there is still downward pressure on housing prices, and the current increase in volume may be more of a "quantity for price" exchange. On the other hand, inventory remains high, and the destocking cycle remains lengthy. This means that there are still significant risks for real estate enterprises, and the real estate sector as a whole continues to drag on the economyThis may also be the main reason for the further tightening of real estate policies at this meeting.

Conclusion

In summary, although Sunac China's sudden discount rights issue during the warm policy environment has harmed the interests of retail investors, it seems somewhat unethical. However, from the perspective of the company, Sunac China's discounted rights issue this time is also to alleviate the company's liquidity crisis and address the urgent debt pressure.

But what is curious is which "white knight" has suddenly invested in Sunac China. After all, with the continuous industry scandals outside and the looming company liquidity crisis inside, the capital entering Sunac China can be considered as "brave warriors"