Sunac Investment in Kaisa Said to Get Shenzhen Officials Nod

The government in the southern Chinese city of Shenzhen has backed Sunac China Holdings Ltd. buying a stake in troubled property developer Kaisa Group Holdings Ltd., according to a person with knowledge of the matter.

Officials have given initial support to Sunac to acquire the founding Kwok family’s stake, the person said, asking not to be identified because discussions haven’t been made public. City officials have met former Kaisa Chairman Kwok Ying Shing in Hong Kong several times since he resigned on Dec. 31, the person said.

Sunac has signed an agreement to buy a 49.3 percent stake in Kaisa from the Kwok family, Caixin reported earlier on Friday, citing an unidentified person. An acquisition of that size would imply a total consideration of up to HK$5.2 billion ($671 million), based on a premium of as much as 30 percent to Kaisa’s last-quoted share price, according to Citigroup Inc. estimates.

The Shenzhen government is seeking investors for Kaisa after it missed a bond payment due Jan. 8. Kaisa would become the first Chinese developer to default on a dollar bond if it doesn’t pay the missed $23 million coupon when a 30-day grace period expires.

An acquisition by Sunac “will be absolutely good news for Kaisa’s creditors because that means the white knight has appeared,” Johnson Hu, a Hong Kong-based property analyst at CIMB Securities Research, said by phone. “For Sunac, the market needs to see more specific details as there are still many uncertainties” regarding apartments blocked from being sold, the acquisition price and bank debts, Hu said.

Shares Suspended

Kaisa’s troubles first surfaced in December when local authorities restricted sales of some of its properties, prompting concern among investors of political risks associated with Chinese developers. Kaisa is being investigated over alleged links to a senior official in the city, people familiar with the matter said this month.

An external spokeswoman for Sunac declined to comment. Frank Chen, head of investor relations at Kaisa, said he had “not been told of anything” regarding the Sunac purchase. Three calls to the Shenzhen government media office went unanswered.

Sunac suspended trading of its shares in Hong Kong on Friday pending an announcement. The stock was unchanged at HK$6.94 on Thursday and has declined 12 percent this year. Kaisa shares have remained suspended since Dec. 29.

Kaisa’s 8.875 percent notes maturing in 2018 jumped 15.88 cents to 77.39 cents on the dollar as of 1:33 p.m. in Hong Kong, according to Bloomberg-compiled prices. That’s the biggest one-day rally since the securities were sold in March 2013. Its 10.25 percent notes due 2020 advanced 16.26 cents to 77.78 cents on the dollar, also a record move.

Takeover Rules

The Kwok family is the biggest shareholder in Kaisa with a

49.3 percent stake. The second-largest shareholder is closely held Sino Life Insurance Co., according to data compiled by Bloomberg.

Hong Kong’s takeovers code allows an acquirer to avoid making a general offer if a change of control is considered a rescue of the listed company. That waiver may require the approval of shareholders who are not directly selling their stakes, but even that condition may be side-stepped depending on the urgency of the rescue, according to the rules.

“There are occasions when a company is in such a serious financial position that the only way it can be saved is by an urgent rescue operation which involves the issue of new securities without approval by a vote of independent shareholders,” the takeovers code states.

‘Lucrative’ Land

The sale of a stake in Kaisa is “good news as it will remove what has been the most destabilizing factor in the market,” Alan Jin, Mizuho Securities Co.’s Hong Kong-based analyst, said by phone. “It’s positive for Sunac as well” as the Tianjin-based developer will get quality assets in a major city where it has little presence, Jin said.

Kaisa has a “lucrative” portfolio in land-scarce Shenzhen and land in cities including Guangzhou and Nanjing, the Citigroup analysts wrote. Its land bank value in first- and second-tier cities has risen 66 percent to about 63.5 billion yuan at current prices, they wrote.

Sunac, controlled by Chairman Sun Hongbin, dropped a HK$6.3 billion deal to buy a 24 percent stake in property company Greentown China Holdings Ltd. last year.

Acquiring Kaisa would give Sunac, a developer of high-end apartments with a focus on bigger cities such as Beijing, a “shortcut” into Shenzhen, which it has wanted to enter, Hugo Hou, an analyst at Haitong International Securities Co., said.

Twenty-five of 26 analysts have a buy rating on Sunac’s shares and one recommends holding the stock, according to data compiled by Bloomberg.

Shenzhen’s new-home prices rose in December, the first of the 70 cities tracked by the government to see an increase in four months, after the central bank cut interest rates.

— With assistance by Dingmin Zhang

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