In the deal, the company agreed to inject a dozen commercial properties into Shanghai Shimao for as much as 7.5 billion yuan worth of new shares and make the Shanghai developer its indirectly owned subsidiary.

The deal would help clarify the companies' roles, making Shanghai Shimao a commercial property developer and Shimao Property a residential player.

Analysts said Shimao Property would benefit from the deal as the Shanghai-listed shares had a higher valuation than its own, while Shanghai Shimao could gain from paying only shares for the prime assets.

Shimao Property shares trade at 20.93 times earnings, compared with more than 30 times for Shanghai Shimao.

The substantial premium on A shares was created after the Shanghai market jumped 130 per cent last year and about another 50 per cent so far this year, fuelled by investors who kept channelling low-interest bank deposits into shares.

UBS property analyst Eric Wong said that Shimao Property was the first mainland company to use such arbitrage from the gap between A shares and H shares.

'The deal is good for the Shanghai-listed unit and the Hong Kong-listed unit,' said Mr Wong. 'The two companies will have a clear investment division.'

After the deal is completed, Shimao Property would focus on the residential and hotel developments while Shanghai Shimao would switch its core business from luxury homes to commercial and retail properties.

Shimao Property expected Shanghai Shimao to have its own direct access to the equity and debt markets in the mainland to fund its commercial properties business.

The 12 properties Shimao Property plans to sell have a total gross floor area of about 4.07 million square metres and are located in Shanghai, Jiangsu, Zhejiang, Liaoning, Auhui and Beijing. They include the Beijing Huaping Plaza.

In return, it will get as much as 700 million new A shares in Shimao Shanghai at 10.68 yuan each.

Shares in Shimao Property ended unchanged yesterday at HK$17.90, while shares in Shanghai Shimao jumped by the daily 10 per cent limit to close at 17.77 yuan after the announcements were made.

Shimao Property has development projects in the mainland including residential, hotel and commercial properties. It now has a land bank of about 20.8 million square metres in 17 mainland cities.

An analyst said the commercial properties could provide a stable income and major growth potential as the mainland's strong economic expansion would increase demand for retail and office properties.

Good for both

Shimao Property has agreed to inject a dozen commercial properties into Shanghai Shimao for new shares worth as much as: Y7.5b