Developer eyes top 10 rank in China

China Merchants Property, a mainland-listed developer, plans to buy more land in first and second-tier cities and enter the ranks of the top 10 players in the sector in the next few years, although expensive land prices pose a big challenge, a senior executive said.

Board secretary Liu Ning said the company hoped to gain approval from regulators towards the end of next month for a plan to raise 6.5 billion yuan (HK$8.3 billion) via a private placement.

Last year, China Merchants Property bought a Hong Kong-listed shell company, Tonic Industries Holdings, now renamed China Merchants Land, as its overseas fundraising platform to fuel expansion. It issued its first bond in Hong Kong last week, raising US$500 million at a coupon rate of 4.021 per cent.

Buying a Hong Kong-listed shell company and using it to issue bonds in the city has become a vital refinancing channel for mainland developers since 2009, when Beijing virtually closed the capital market for property firms as it sought to rein in home prices.

"[Mainland developers] are swimming in the same pool and will all catch cold if there is a virus, except for one or two strong swimmers," Liu said. "The company's scale is an indication of its immune response."

Her company, the mainland's 12th largest developer by sales, is targeting contracted sales of 100 billion yuan a year by 2018, up from an estimated 40 billion yuan this year. "We want to enter the top 10," she said. "It's difficult as the threshold will be constantly pushed up."

The developer has accelerated its land purchases in the second half of the year, buying 12 parcels for a total of 14 billion yuan between July and November, double the amount it spent in the first half.

"We will buy more. We have set our sights on some parcels for more than a year now," Liu said. "But because we are very cautious not to buy any 'king land' (parcels fetching the year's highest prices outright or by per square metre), it's been difficult for us. We have also been asking ourselves whether we have been too conservative."

That strategy has kept the company out of Shanghai and Beijing, the mainland's two most lucrative markets. It was looking for opportunities to team up with other state-owned enterprises to develop land they owned in these two cities, Liu said.

"Our focus for future development now lies in second-tier cities," Liu said. The land China Merchants Property has bought this year is mainly in Foshan, Suzhou, Hangzhou, Chengdu and Chongqing, among the 26 cities where it has already established a presence.

It also has eyes on regional hubs such as Zhengzhou for future expansion, but will refrain from entering lower-tier cities which are now suffering from oversupply.

To combat falling profit margins, a headache for the whole industry, the company has been trying to shorten development cycles, reduce financing costs, conduct research into construction technologies and build up strong local teams.

It last raised funds from the domestic stock market in 2008 and is now awaiting clearance from the Ministry of Land and Resources, which will check whether it has hoarded land or violated other rules, following the China Securities Regulatory Commission's acceptance of its private placement application late last month.

The CSRC is overhauling rules for public listings and has accepted about 40 fundraising applications from domestic property firms in the past four months. However, it has yet to announce any approvals.

"I've heard that the result for the first batch of applications has come out already and the examination is very strict," Liu said. "I don't know when our second batch will be handed over [to the land ministry from the CSRC] - probably in the next one or two weeks."

After receiving the cases, the ministry must respond in 30 working days.

A fall in the share price since the announcement of the proposed private placement poses a new problem for the developer, with investors disappointed that its parent, China Merchants Shekou Industrial Zone, has no plan to inject its land reserves in Qianhai, a Shenzhen test bed for financial reforms where land prices have been soaring.

Liu said that due to the launch of financial reforms in the zone, the parent company might need to pay extra money to local governments for its land reserves there as the use rights were changed from industrial to commercial. Because of that, "any asset injection plan involving Qianhai is not clear", she added.

China Merchants Property shares closed at 21.12 yuan in Shenzhen yesterday, compared with an agreed price of 26.92 yuan that the parent is buying at via the private placement.