HONG KONG – A Chinese state-owned drug developer and distributor plans to raise as much as $700 million through a new share placement.

China's Sinopharm Group Co. recently disclosed a plan to issue almost 199 million Hong Kong shares at HK$28.40 (US$3.66) per share. The new placement will account for 20 percent of the company's shares in Hong Kong and 7.74 percent total issued share capital.

The placement will help the company raise money to support its operations, said Jonathan Hsu, head of China health care equity research at China Merchants Securities in Hong Kong.

"The money will also be used for merger and acquisitions of smaller local drug distributors in rural areas which is one of the driving forces for the company's development," he said.

"Because the public hospitals run on government budgets, so there's a delay of about three months in payment," said Hsu. "As the country's biggest pharma distributing company, Sinopharm has the stress of cash flow so they need to raise the money."

The maximum amount of net proceeds, approximately $700 million, will be used for the expansion of Sinopharm's pharmaceutical distribution and retail network and replenishment of liquidity after the expansion. Details of the actual use of the proceeds will be disclosed in the company's future announcements. The net price raised per H-share (the term used for shares of Mainland China companies listed in Hong Kong) upon completion of the placement will be about HK$27.93.

The company is looking for the placement to broaden both its shareholder and capital bases, the company said in a note filed with the Hong Kong Stock Exchange.

The state-owned Assets Supervision and Administration Commission of the State Council (SASAC), which is generally in charge of state-owned companies, approved the new placement on Sept. 5. The China Securities Regulatory Commission (CSRC) followed suit on Nov. 19.

The placement comes as stock markets in Hong Kong and Shanghai join together through the Shanghai-Hong Kong Stock Connect pilot program that makes it possible for investors in one jurisdiction to invest in the other.

The CSRC and the Hong Kong Securities and Futures Commission announced the program, which is also known as the "Shanghai- Hong Kong through train" scheme, on April 10 and finally launched it on Nov. 17.

The through-train program is part of a wider opening of China's capital account and aimed at enhancing flows in the stock market. It is also another step toward greater economic liberalization.

So far, however, the program has had little impact on share values.

"There was a slight rise after the Shanghai and Hong Kong stock connection started but no drastic changes have happened so far," said Lilian Wan, equity associate at Jefferies Hong Kong. "Some companies offer discounts for their Hong Kong shares, so there were more buyers and the price went up a little."

And last week, in a surprise move, the People's Bank of China announced a cut to the country's benchmark interest rates that took effect Nov. 22. China's central bank decided to lower the one-year RMB benchmark deposit rate by 25 basis points to 2.75 percent and the one-year lending rate by 40 basis points to 5.6 percent. The PBOC also widened the floating range for deposit interest rates, which determines how much interest banks can pay on deposits, to 1.2 times the benchmark rate.

"The interest rate cut is good for distribution companies like Sinopharm," Wan said. "The financial costs are high for these companies because of their high debt level, so the interest rate cut would be beneficial and have an positive effect on net profits."

Sinopharm has several arms, but its largest is its national drug distribution network that covers 31 provinces, autonomous regions and municipalities. The company also has 30 international standard distribution centers.

Through its vaccine-making subsidiary, Beijing Tiantan Biological Products Co. Ltd. (SH: 600161), Sinopharm also manufactures more than 80 percent of the vaccines China uses through its Expanded Program on Immunization.

As the largest Chinese medical and health care group directly managed by the SASAC, Sinopharm group has built bases for biopharmaceutical products such as anesthetics and psychotropic, anti-infection, antitumor, cardiovascular and respiratory system drugs.