Investment Action: buy 3% position in Beijing Capital Land @HKD2.5 per share
Offer price: HKD 2.8
Current share price: HKD 2.5
Probability of success: 90%
Beijing Capital Land is a SOE real estate developer that is majority owned by the Beijing Capital Group which is in turn fully owned by Beijing SASAC (SASAC is the department that manages state own assets). And it is currently being privatised by Beijing Capital Group through a cash offer of HKD 2.8 per H share. In short, Beijing city government is buying the minority shareholders of Beijing Capital Land.
Beijing Capital Land was first listed in 2003 in HK stock exchange and its total return since IPO reflects the quality of the business. In 2020, Chinese government started to cap the leverage employed by real estate developers through three measures – 1) liability to asset ratio, 2) debt to equity ratio and 3) Cash to short term debt ratio. If the real estate developer is determined to be too leveraged according to the three metrics stated above, then the developer cannot increase total leverage. In essence this is very similar to the prudential regulation faced by banks. This sparked off a wave of either equity issuance, asset sales and/or price discount on new home projects to recoup cash in the Chinese real estate sector.
Unfortunately for Beijing Capital Land, it does not meet the debt to equity ratio and cash to short term debt ratio. Within this context, the parent company is privatizing Beijing Capital Land such that it would be in a better position to inject equity into the developer and meet the regulatory standard.
Despite the offer price of HKD 2.8 carrying a whopping 62% premium over the last trading price before announcement, the offer price implies a price to book ratio of 38%. So valuation also make sense for Beijing Capital Group
And the deal would require ~HKD 5.3bn of cash which Beijing Capital Group can easily finance out of its own balance sheet.