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SCMP Reporter

Red chip Guangzhou Investment Co has raised $1.27 billion through a share placement and subscription in preparation for an expansion into the Chinese hotel market.

The company placed 320 million existing shares with professional investors at $3.98 a share, a 4.1 per cent discount to the stock's close yesterday of $4.15, a three-year high.

The shares, representing 10 per cent of the firm's enlarged issued capital, were sold by controlling shareholder Yue Xiu Enterprises, which in turn subscribed for 320 million new shares at the same price after obtaining minority shareholders' approval.

The placement, handled by Peregrine Brokerage, was oversubscribed, sources close to the deal said.

The proceeds from the exercise would be used to buy hotels in China and as working capital, a Guangzhou Investment spokesman said.

'We are looking for another source of recurring revenue because we have spun off GZI Transport, one of our revenue generators,' he said.

GZI, which operates toll roads, listed on January 30 with an initial public offering of $104.5 million. Its issue was 529 times subscribed.

 Despite the dilution effect of the placement, the spokesman said the acquisitions would eventually enhance earnings per share.

At the top of the buying list was the five-star Dongfang Hotel in Guangzhou, sources said.

 The company is considering the purchase of five more hotels, in Beijing and Xian.

Some of the hotels are believed to be controlled by Yue Xiu, the commercial arm of the Guangzhou municipal government.

Some analysts speculated that Guangzhou Investment would spin off and list its hotel wing once it matured.

HG Asia's assistant director Eddie Lau said: 'At this stage, [the placement] is positive news, as it will pull down the gearing and broaden the company's recurring income base.' Other analysts were not so confident that the move was positive in the long term.

One analyst said: 'On an operating business basis, I doubt whether they should engage in hotels. In terms of synergy, it does not seem to fit.' He said Guangzhou's hotel occupancy rate was unimpressive.

Analysts were unsure how investors would react to the placement. Cash calls are typically followed by a correction as investors' holdings are diluted, but placements by red chips often have the opposite reaction.

  An analyst at a British-based investment bank said: 'The stock has done quite well, but unless the Guangzhou municipal government stops stuffing it [Guangzhou Investment] with mediocre assets and taking cash out, then people's perceptions may change.' STOCK ROOMS GZI places 10pc its enlarged capital Investors buy 320m shares at $3.98 Capital to be used to buy hotels in China 



Guangzhou Investment share issue raises $1.27b