Citic Pacific

Chinese conglomerate Citic swaps residential properties for China Overseas’ shares and commercial projects

The agreement should have little impact on Citic’s net asset value, analysts say

PUBLISHED : Monday, 14 March, 2016, 9:38am
UPDATED : Monday, 14 March, 2016, 7:08pm

Citic, China’s largest state-backed conglomerate, will sell nearly all of its residential property projects worth around 31 billion yuan (HK$37.02 billion) to China Overseas Land & Investment in exchange for a 10 per cent stake in the property giant and 6.15 billion yuan of the latter’s commercial properties.

Citic expects to book a gain of HK$9 billion to HK$11 billion from the disposal, on which an agreement was signed on Sunday.

“The transaction will enable the company to focus on commercial real estate, particularly large integrated projects,” Citic said in a filing to Hong Kong’s stock exchange on Monday.

“At the same time, the company will retain its exposure to China’s residential market through its approximately 10 per cent stake in China Overseas.”

The deal, which follows close on the heel of rival China Vanke’s preliminary cooperation pact with subway operator Shenzhen Metro involving a potential assets-for-shares deal, and China Merchants’ intra-group property assets revamp, points to a trend of property assets restructuring among state-backed firms, said Credit Suisse head of Asia real estate research Du Jinsong in a report.

“The trend of property-related restructuring [among] state-owned enterprises is real,” he said. “We expect Greentown [China] to be among the next to benefit.”

Citic said China Overseas will issue 1.09 billion new shares to Citic at HK$27.13 each, worth a total of HK$29.72 billion. That is a 5.4 per cent premium to Friday’s closing price.

READ MORE: China’s Citic to consolidate its Hong Kong and mainland property operations soon

Citic’s share price Monday closed 2.6 per cent lower at HK$12, after soaring 9.2 per cent on Friday to its highest in two months after a Mingpao news report said it would sell all of its real estate business to China Overseas. China Overseas’s share price Monday closed 1.75 per cent higher at HK$26.2, after an intraday gain of as much as 6.8 per cent.

Citic said the final transaction price will be subject to the results of an asset valuation of the property assets exchanged, as well as approval by the latter’s shareholders in a general meeting.

The Citic residential properties to be sold booked a total net profit of 1.1 billion yuan last year, down 14.8 per cent from 2014.

They include “substantially all of the residential-focused real estate projects owned and managed” by Citic, which are predominantly located in the mainland’s first and second-tiered cities.

Analysts at brokerage Citi said the deal will have minimal impact on Citic’s net asset value, adding the gain to be booked from the asset sale is substantially smaller than the US$1.5 billion to US$1.7 billion asset impairment Citi said it would book for its iron ore mining project in Australia last year due to sharply lower iron ore prices.

Analysts said the asset disposal to China Overseas would benefit both companies amid an ongoing industry consolidation.

“Citic’s brand in the [residential] real estate industry is not so strong. The sale could maximise its value especially when the market is hot at the moment, ” said David Hong, head of research at China Real Estate Information Corp.

China’s housing market has seen strong sales rebound in first and some second-tier cites in the past few months, driven by government policy support.

READ MORE: New World China Land sells three projects in China to Evergrande for HK$16.36 billion

Recent consolidation cases include the sale of eight mainland Chinese residential projects by various firms controlled by tycoon Cheng Yu-tung worth HK$40 billion to mainland developer Evergrande Real Estate.

Ratings agency Standard & Poor’s said the acquisition of Citic’s assets that include 24 million square meters of land bank by China Overseas will significantly broaden its operating scale and solidify its position as the market leader. China Overseas has 40.7 million square meters of land bank.

Citic, hit by years of losses and asset write downs from its more than US$10 billion Australian iron ore mining project that suffered major construction delays and cost blowouts, bought in 2014 some 227 billion yuan worth of assets in various industries from its parent so that all but 1 per cent of the parent’s assets are publicly listed.

After the restructuring, financial services accounted for the bulk of its profit and net assets.

Citic last August said it had started to integrate its two property arms – China-focused Citic Real Estate acquired from the parent – and Citic Pacific Properties that it owned before the restructuring and had projects in both Hong Kong and the mainland.

Citic chairman Chang Zhenming said last year the company would not rule out the possibility of a separate listing of the integrated operation in the stock market.