News Alert: Henan provincial government en-route for rescue
- CCRE announced after market close yesterday the entering of a framework agreement where its controlling shareholder will dispose part of his shares, and CCRE to issue a HK$708m CB to an entity wholly owned by the Henan provincial government
- The partial share disposal by the controlling shareholder will be priced with a 23% premium to yesterday’s closing price, and the CB will be priced at 5% coupon at a 85% conversion premium
- We believe the deal is favourably priced for CCRE, and the move illustrates the strong willingness that the Henan provincial government has to support the regional-focused developer
- We expect the market to react positively towards the news, and both CCRE and CCNL’s share prices will likely see decent rebounds from this development
What’s new?
CCRE (832 HK, under review) announced last night after market close that it has entered into a framework agreement with Henan Tongsheng Zhiye (an entity wholly owned by the Henan Provincial People’s government) that 1) controlling shareholder to sell 860m shares to it at HK$0.8/sh; and 2) CCRE to issue a HK$708m 5% coupon convertible bond due 2024 to Henan Tongsheng at a conversion price not higher than HK$1.20/sh.
Our view
Henan provincial government coming to rescue… The developer’s weak presales performance in April and May as a result of subdued market sentiment and COVID-19 lockdown measures in parts of Henan has put pressure on its cashflow and liquidity position. The framework agreement came in just a week after the news where CCRE pledged its shares in two cultural tourism projects to the provincial government in return for cash, signaling the provincial government’s willingness to lend support to the Henan-focused developer.
…at a fairly decent cost. Mr. Wu’s partial disposal of shares (c.29% of issued share capital) will be priced at HK$0.80/sh, which would translate to a c.23% premium to CCRE’s closing price yesterday and is roughly at the range where the stock was trading in mid-April. Meanwhile, the proposed issuance of CB has a decent duration of 2 years (with option to extend an extra year upon mutual agreement) and is priced at a fair 5% coupon or 9% yield to maturity, with a convertible price of HK$1.2/sh that represents c.85% conversion premium. Assuming the conversion price is reached, a total of c.590m convertible shares will be issued that would represent c.16.6% of CCRE’s total issued shares (or c.14% dilution to FY24F EPS) We believe terms are actually fairly favourable in the perspective of CCRE considering current market conditions.
A positive development that will likely drive some share price recovery both for CCRE and CCNL. While the completion of the transactions is subject to the fulfillment of certain conditions and the fund raised in the two transactions are insufficient to settle CCRE’s upcoming offshore bond due of US$500m in Aug-22, we believe this nevertheless is a strong sign that the Henan provincial government is willing to lend support to the developer. We believe the announcement will be taken in positively by the market, and share price for both CCRE and CCNL (of which whose share price has also been under pressure with CCRE’s mounted liquidity risk) to see decent rebounds.