China Overseas Buys Citic's Property Assets for $4.8 Billion

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  • China Overseas will sell 1.1 billion shares at HK$27.13 each
  • Sale will leave Citic with a 10% stake in China Overseas

China Overseas Land & Investment Ltd. said it will buy the Chinese residential property assets held by Citic Ltd. for about 31 billion yuan ($4.8 billion) as it expands its presence across the nation’s cities amid surging land prices.

China Overseas will sell 1.1 billion shares at HK$27.13 each to the Citic companies as part of the transaction, it said Monday in a statement to the Hong Kong stock exchange. China Overseas closed 1.8 percent higher at HK$26.20 in Hong Kong, after earlier rising as much as 6.8 percent. Citic fell 2.6 percent to HK$12.00, after jumping 9.2 percent on Friday.

The property projects that China Overseas is acquiring span 25 Chinese cities including top-tier hubs such as Beijing, Shenzhen and Shanghai and smaller ones such as Foshan and Chengdu. Property prices in China’s largest centers have surged this past year amid the government’s moves to stimulate the real estate market, and regulators have pledged to dissolve a glut of unsold homes in lower-tier cities.

Edison Bian, a Hong Kong-based analyst at UOB Kay Hian Ltd., said the move is “justified” for China Overseas given its ample cash and the intensifying competition for land amid high prices. The 24 million square meters of land being acquired, equivalent to more than half of China Overseas’ existing land bank as of June 30, will be “highly beneficial” to the company’s future development, according to the statement.

Catching Up

The developer “struggled to finish the sales target last year, due to the limited saleable resources, leading to this major acquisition which will certainly help the company to catch up the game and remain seated in a leading position,” he wrote in an e-mailed note.

Funding the acquisition with new shares also helps China Overseas preserve cash,  “so it can continue buying after this deal,” said Alan Jin, a Hong Kong-based real estate analyst at Mizuho Securities Asia Ltd. “The company’s balance sheet remains very solid.”

Citic, China’s biggest conglomerate that sprang from the nation’s first state-owned investment corporation, has been seeking to unlock value from its land portfolio over the past year as it streamlines its operations amid a broader restructuring of state-owned enterprises. The sale will leave it with an approximately 10 percent stake in China Overseas and it will also receive additional assets valued at an estimated 6 billion yuan, according to the statement. HSBC Holdings Plc advised China Overseas on the deal.

“Property restructuring has been a long-awaited move by investors,” analysts at Credit Suisse Group AG wrote in a note to clients on Monday. The move at Citic, along with others in recent months, “led us to believe that the trend of property-related SOE restructuring is real,” according to the report.

Greentown China Holdings may be the next one to benefit from the restructuring of State-owned companies’ property-related operations, the analysts wrote.

The transaction may be negative for China Overseas as Citic’s high concentration of assets in so-called Tier-3 Chinese cities is not in line with its stated strategy, according to Credit Suisse, which said the potential for culture shock during the integration is also seen as a risk.