China Everbright Limited (CBL), part of the China Everbright Group, one of the larger state-owned enterprises in China, is planning to invest around S$284 million into China-based real estate outfit Ying Li International Real Estate (SGX: 5DM). In Singapore’s share market, China-based companies listed here, such as Ying Li International, are known as S-chips.
Incidentally, another arm of China Everbright Group, China Everbright International (CBI), had recently planned to inject all of its water infrastructure assets into China-based water-treatment services provider Hankore Environment Tech Group (SGX: U9E). The assets from CBI are valued at around S$1.2 billion and upon completion of the deal, CBI would own around four-fifths of Hankore Environment.
Coming back to CBL and Ying Li International, the latter announced that it is planning to issue new ordinary shares and perpetual securities to the former. Ying Li International will need shareholders’ approval for this deal as it involves a dilution of more than 10% of current shareholders’ stakes in the company.
For some exact figures, Ying Li International is looking to issue 381 million new shares of itself at S$0.26 each to CBL. The new shares would make CBL the second largest shareholder of Ying Li International behind Fang Ming, the real estate outfit’s executive chairman. After the shares are issued, Ying Li International might then issue up to S$185 million worth of perpetual securities to CBL. For some perspective, Ying Li International had 2.169 billion shares outstanding as of 31 March 2014, so the new number of shares to be issued is certainly not trivial.
Ying Li International sees strong synergy between itself and its newest investor as it can leverage on CBL’s network and influence in China to acquire good location for new projects in Tier 1 and Tier 2 cities in the country. Secondly, the injected funds can help in financing Ying Li International’s current and future projects.
Meanwhile, CBL sees great value in Ying Li International’s strategy of focusing on commercial properties. It believes that the residential property market in China has been developed too aggressively due to the use of leverage and might be at risk if the market slows down; when that happens, Ying Li International might be in a better position compared to other developers as long as its commercial properties are sought after by tenants.
Although the connection with CBL might be beneficial for Ying Li International’s investors, they might need to consider if any of the potential benefits would be worth the dilution of their stake in the company. With Fang Ming controlling more than 40% of the voting rights as Ying Li International’s largest shareholder, it might take a lot of effort for other shareholders to resist this deal if they want to.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.