Sunac China shares plunge amid talks to buy 30 per cent of Greentown

Developer suffers its biggest drop in three months after an announcement revealing discussions to buy 30 per cent of Greentown

PUBLISHED : Saturday, 17 May, 2014, 2:02am
UPDATED : Saturday, 17 May, 2014, 2:02am

Shares of mainland developer Sunac China suffered their biggest decline in almost three months yesterday but Greentown China soared 11 per cent during the session after the two announced they were in talks for Sunac to buy up to 30 per cent of Greentown in a deal worth at least HK$5 billion.

Sunac shares closed down 6.5 per cent yesterday at HK$3.86, its biggest fall since February 24. Greentown eventually settled up 2.82 per cent at HK$8.03.

Investors are concerned about Sunac's possible capital expenditure and risks arising from the integration.

Tianjin-based luxury-home builder Sunac, in which US buyout firm Bain Capital has a stake, is in discussions to buy shares from Greentown's chairman Song Weiping, Song's wife and chief executive Shou Bainian, according to statements published by the companies on Thursday.

Because of Sunac's strong sales execution and the two developers' close relations in the past two years, some analysts recommended the stock as a "buy".

Sunac’s strong sales execution should continue to provide a liquidity buffer

"It is too soon to determine what extent the acquisition will influence the two companies' credit profiles," global ratings agency Standard & Poor's said yesterday. "We expect [Sunac] to gradually expand its offshore financial channels after the acquisition through closer co-operation with Wharf (Holdings) Ltd, currently Greentown's second-largest shareholder."

Fitch Ratings also said yesterday Sunac had sufficient liquidity to finance the deal, which was not likely to affect its ratings. Sunac had 16 billion yuan (HK$20.1 billion) of cash equivalents and restricted cash at the end of last year. It recorded 14.2 billion yuan of contracted sales in the first four months and paid less than 6.5 billion yuan in land premiums.

The deal comes just as the mainland property market is cooling off, although the People's Bank of China earlier this week called on banks to speed up mortgage loans for first-home buyers in an apparent effort to stabilise the market as a weakening property sector dented the country's economic growth.

The two developers forged a strategic partnership in a previous property market correction when Greentown was caught off guard by credit tightening after its aggressive expansion.

Sunac spent 3.37 billion yuan to buy a 50 per cent stake in nine Greentown projects in Shanghai and neighbouring Jiangsu province in 2012.

The companies also set up a 50-50 joint venture in Shanghai that year, and they later bought a few land parcels in the Yangtze River Delta region.

"Sunac's strong sales execution should continue to provide a liquidity buffer for its large capital expenditure over the next 12 months. However, the company's aggressive growth appetite will increase execution risk and put pressure on leverage," S&P said.