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Ying Li Forges Ties With China Giant
Corporate Digest | 02 July 2014
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By: Shane Goh
Articles (99) Profile

China Everbright (CE), part of a large China state-owned enterprise, has taken a slice of Ying Li’s shares. Read on as we uncover their reasons for the move and what does it mean for a potential investor.

As announced on 30 June before trading hours, Hong Kong-listed CE has agreed to exchange $284 million for shares and perpetual subordinated convertible callable securities (convertible securities) in Ying Li International Real Estate.

CE is a subsidiary of China Everbright Group, a China state-owned enterprise (SOE) with assets exceeding Rmb2.6 trillion as at end 2013.

In a media briefing held on 1 July, Shares Investment rubbed shoulders with the management team of Ying Li and CE to better understand the partnership.

The Deal
CE will pay $99 million, or $0.26 per share, for 381 million new Ying Li shares. This represents 17.5 percent of Ying Li’s existing issued share capital, or 14.9 percent of the enlarged share capital.

Simultaneously, CE will swap $185 million for two tranches of convertible securities. Both tranches provide CE with an 8.75 percent coupon rate for three years and are convertible by CE from years three to six at $0.318 apiece.

At $0.318 per share, CE will have to pay an 11.6 percent premium to Ying Li’s last traded share price prior to the announcement to exercise the conversion.

The only difference between the two tranches, apart from the amount (first tranche: $165 million, second tranche: $20 million), is that the first tranche is callable only after five years while the second tranche has an initial callable period between years two and three, before being callable only after five years has lapsed.

If fully converted, CE will gain an additional 581.8 million new Ying Li new shares. Following which, CE will hold a 30.7 percent stake in the further enlarged share capital.

Fourth from Right: Ying Li's chairman, Fang Ming. Third from Right: CE's Head of Real Estate Investment and Fund Raising, James Pan. Source: Financial PR

Tap On CE’s Strengths
CE has also entered into a framework agreement with Ying Li. The agreement will see the two firms cooperate on existing and new projects within Chongqing and other first- and second-tier cities in China.

Ying Li’s chairman, Fang Ming, highlighted that a strong gross domestic product and urbanisation growth rate in Chongqing, China, where the company conducts its business, has spurred many property developers to foray into the city.

However, Ying Li has faced funding difficulties with total cash of Rmb717.1 million, compared to total borrowings of Rmb2.9 billion, as of 31 March.

The cash injection will shore up Ying Li’s cash position by approximately Rmb1.4 billion and reduce its gearing ratio from 64.1 percent to 24.6 percent, on a pro forma basis.

Apart from a financing benefit, Ying Li will be able to tap on CE’s network to secure prime location projects within first- and second-tier cities in China.

Controlled Growth
James Pan, Head of Real Estate Investment and Fund Raising for CE, shared the key drivers behind the company’s purchase into Ying Li’s shareholdings.

While CE has worked with other companies previously on a project level, this is the first time it has taken a stake at the company level. Pan pointed to the management as a crucial factor.

A controlled growth path, compared to other developers who went on a massive expansion route, and a focus on strategic locations are two standout reasons CE found favourable in Ying Li noted Pan.

Moving forward, the partnership will continue to target commercial property developments within the city centre.

Pan expects Ying Li to continue running the property development and engineering aspect of the entity while CE brings in its property management and financing capabilities.

Potential Spin Off
As of 31 December 2013, CEL’s real estate portfolio comprised of 18 residential and commercial properties located primarily in first- and second-tier cities within China.

Pan shared that the partnership will explore a potential spin off of the properties held by Ying Li and CE into a real estate investment trust.

This would allow the firm to access the capital markets for capital recycling but continue providing quality management services to its tenants and maintain a stake in the buildings.

SI Research Takeaway
Having a well-funded SOE take a stake in your firm would definitely help open doors for any company. I view the move favourable as it may the push Ying Li needs to branch out of Chongqing city.

However, it does not change the marco view of a softening Chinese property market and tightening of credit facilities by the banks. In this regard, Ying Li and CE would have to navigate the country carefully for potential development sites before ploughing their money in.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Ying Li Int'l Real Estate  0.133 +0.001 +0.76%   
Business: Property developer based in Chongqing. [FY18 Turnover] Property development (74.6%), property investment (25.4%).

Insight: May-19, 1Q19 revenue fell 53.8% to Rmb143m attribu... Read More

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