(Bloomberg Gadfly) -- Sunac China Holdings Ltd. is finally doing something Beijing likes -- deleveraging by selling equity.
The developer's HK$4 billion ($512 million) placement of 220 million shares is being done at 22 times earnings, by far the highest valuation in its trading history. While the deal surprised nobody, the next steps might.
Sunac's Hong Kong-traded shares behave like a mainland stock. Chairman Sun Hongbin owns half of the company, while one-quarter is held by Chinese investors through the Hong Kong-Shanghai Stock Connect. As a result, value-oriented overseas holders have little say in this sentiment-driven investment. While only seven of the 20 analysts tracked by Bloomberg have a buy rating, the stock's valuation hasn't stopped Sunac soaring 188 percent this year.
Sun has a dilemma now, though. He's known in the market for not wanting to part with his shares. After the placement, his stake will be diluted to 50.9 percent, down from 52.6 percent and closer to the uncomfortable 50 percent level.
There's no question Sunac needs cash. Bloomberg Intelligence analyst Kristy Hung says that even after the placement, net debt stands at 349 percent of equity, well above the 228 percent leverage ratio at the end of 2016 and the industry average of 70 percent.
Almost 30 percent of the debt outstanding at end-2016, or 33 billion yuan ($4.9 billion) will be due this year, according to Sunac filings. In the first half, the company spent 19 billion yuan buying land, 15 billion investing in Leshi Internet Information & Technology Corp. and 44 billion yuan purchasing assets from Dalian Wanda Group Co. -- all of which need financing. At the end of 2016, Sunac sat on 52 billion yuan in cash.
Another placement would make it expensive for Sun to retain control. Sunac is now a HK$73 billion company. Buying just 1 percent in the open market would cost HK$730 million.
Meanwhile, Beijing is closing Sunac's debt options. Chinese banks are reportedly investigating Sunac's trust-financing deals. After the 2016 boom, corporate bond issuance by high-yield developers in China dwindled to almost nil as Beijing prioritizes deleveraging.
A sale of offshore dollar bonds would require the National Development and Reform Commission's stamp of approval.
Relationships with the NDRC can be critically important. Greentown China Holdings Ltd., a quasi-SOE that counts China Communications Construction Co. as one of its biggest shareholders, got government approval to issue a well-received perpetual bond in Hong Kong last month. A fellow developer, Greenland Hong Kong Holdings Ltd., failed to get that stamp and had to sell 364-day notes this month at a higher cost -- 4.5 percent for the new securities, compared with the 3.875 percent coupon on a three-year bond sold a year ago. (Debt with a maturity of one year or more requires NDRC approval.)
So Sun must weigh his options. Will he cede some control, seek expensive short-term financing in Hong Kong, or sell some of Sunac's assets as his friend Wang Jianlin has been doing at Dalian Wanda?
There's no shame in partnering with the state. China Vanke Co., a blue-chip develop, has already surrendered and now counts Shenzhen Metro Group Co., a state-owned enterprise, as its majority shareholder.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.