Ganglong China pulls heavyweight into its corner

Ganglong China Property will start trading on the main board on Wednesday, after raising HK$1.57 billion through a Hong Kong initial public offering.

The Shanghai-based developer reportedly priced the flotation at HK$3.93 per share, close to the higher end of the indicative price range of HK$3.60 to HK$4.10.

It has attracted two cornerstone investors, including Successful Lotus, controlled by Peter Lee Ka-kit, co-chairman of Henderson Land Development (0012), which agrees to subscribe to shares worth HK$40 million.

Ganglong's public float is part of a new wave of Hong Kong IPOs by mainland developers and their spin-offs, as the coronavirus pandemic takes a toll on their cash flow and drives up finance costs.

Real estate companies raised HK$4.36 billion through Hong Kong IPOs in the first half, ranking the third-most active industry, following technology, media, and telecom sector and healthcare sector. And it is expected to be the main IPO force in Hong Kong in the second half, according to EY. Meanwhile, the finance costs of 95 mainland developers increased by 1.56 percentage points month-on-month to 6.92 percent in June, data from researcher CRIC showed.

Ganglong was founded in Changzhou, Jiangsu province in 2007 and relocated its headquarters to Shanghai last year. It ranked 83rd among the mainland developers by contracted gross floor area sold in 2019, according to a commissioned C&W report.

The company's project portfolio covers 53 projects in 21 cities with a land reserve of 5.44 million square meters as of March 31, with over 70 percent in Jiangsu province. Ganglong is mainly focusing on second-tier and third-tier cities in the Yangtze River Delta Region with access to High-Speed Rail stations. It is also planning to expand into other markets outside of the region such as Anhui, Shandong and Sichuan provinces and Chongqing city, the company says.

Ganglong has expanded its business aggressively in the past three years. Revenue has surged by 2.82 times to 1.66 billion yuan (HK$1.84 billion) in 2018 and further grew by 19.19 percent to 1.98 billion yuan last year.

Net profit jumped by 10.32 times to 354.83 million yuan in 2018 and surged by 88.27 percent to 668.04 million yuan in 2019. Gross profit margin also climbed to 42.7 percent last year from 21.9 percent in 2017.

But in the meantime, the developer is facing soaring debt.

Ganglong's gearing ratio, or debt-to-equity ratio, climbed to 172.6 percent at the end of last year from 98.8 percent at the end of 2017. That compared with an average gearing of 69.96 percent for all listed mainland developers in 2019, according to mainland real estate website Leju.

What's worse, Ganglong's gearing surged to 251.2 percent as of April 30, due to an increase in bank and other borrowings to finance operations.

Its outstanding bank and other borrowings grew by nearly eight times in two years to 2.85 billion yuan as of December 2019, with the weighted average effective interest rates rising by 2.56 percentage points to 8.82 percent.

Meanwhile, Ganglong's finance costs surged to 78.6 million yuan in 2019 from 5.8 million yuan in 2017, and it is expected to increase significantly due to increased borrowings last year, the company says in its prospectus.

The developer believes the virus pandemic did not have a material adverse impact on its business as the sales slump in the first four months this year is expected to be offset by a recovery in the rest of 2020. It had maintained sufficient working capital in the first quarter, after receiving sales and pre-sale proceeds of around 2.56 billion yuan and around 2.5 billion yuan from the bank and other borrowings, it said.

Ganglong plans to spend 60 percent of the net proceeds to fund land costs of potential development projects, while 30 percent will be used as construction costs for existing projects, and 10 percent for general working capital purposes.