Sunac could become 10th developer to list in HK in three months

With the celebration of Thanksgiving yesterday, 2009 is now officially moving into its last stretch, but the steady stream of Chinese initial public offerings is showing no signs of letting up. Since the beginning of September, Hong Kong alone has seen 25 IPOs (of $100 million or more) worth a combined $19.3 billion, but according to bankers, another seven or eight companies may still squeeze in a deal before investors shut their books for the year.

On Monday Longyuan Power and property developer Kaisa Group started bookbuilding for their respective Hong Kong IPOs, which are seeking to raise a combined 2.8 billion, while Trony Solar kicked off the roadshow for a US IPO that could raise up to $214.5 million. On the same day, bankers started pre-marketing for the upcoming IPOs of PCD Stores (about $250 million in Hong Kong) and Concord Medical Services (on the New York Stock Exchange).

And, on Wednesday, pre-marketing started in Hong Kong for Chinese property developer Sunac China Holdings, which is hoping to raise as much as $400 million with the help of Deutsche Bank and UBS. The fact that bankers believe investors have room for yet another property play is quite remarkable, given that no fewer than eight of the Hong Kong listings in the past three months have come from this sector. Also, investors have already shown that they are getting a bit fatigued with this type of paper and have become increasingly selective about which companies to invest in.

Two of the property developers had to lower the initial price range to get their deals out the door, while Excellence Real Estate Group chose to withdraw its offering altogether after failing to reach the desired order amount. And the latest companies from this sector to approach investors have had to either demonstrate that they stand out versus the peer group in some way -- which gives them pricing power -- or come at increasing wider discounts.

People familiar with Tianjin-based Sunac put it in the first category, saying that the company's established track record in terms of consistently buying land on the cheap and benefitting from asset appreciation is setting it apart. It is also leading to wider-than-average margins, which should be attractive. That said, it is focusing on much the same type of developments as many of the other property companies that are already listed in Hong Kong, such as mid- to high-end residential projects in tier-1 cities like Beijing, Tianjin, and Chongqing. It is also active in Wuxi and Suzhou. Its buildings tend to be large and typically include a commercial element such as retail podiums  

The company has about 3 million square metres of completed developments and another 2 million sqm. It also holds a landbank of about 6 million sqm for future developments.

Another thing that bankers are stressing as they educate investors about Sunac is the high quality of the pre-IPO investors, which include Deutsche Bank, Bain Capital, alternative asset manager CDH and a company called Lead Hill.

Already the company has been approached by investors who are interested in coming into the deal as cornerstones, i.e. they would get a pre-agreed allocation in exchange for not selling its shares for a set period of time, typically six months. However, given the relatively small size of the offering and the presence of international pre-IPO investors already (none of whom will sell in the IPO), the company may decide not to use cornerstones at all, one source said.

Ultimately though, what will determine whether the initial interest is converted into actual orders is the price. The source noted that in light of its location and the type of product the company is focusing on, Sunac is likely to be compared most closely with Shimao, Sino-Ocean Land, Yanlord, KWG Property and Shui On Land, which all trade at 2010 price-to-earnings multiples between 12 and 16.

The two most recent property IPOs in Hong Kong, which priced on November 12 and 18 respectively, achieved widely different multiples. Longfor Properties, a residential and commercial developer with a strong market position in Beijing and Chengdu that is in the process of transforming itself into a nationwide player, came to market at 13.9 times next year's earnings and at a 30.3% discount to net asset value (NAV). Fantasia Holdings Group, which has about 70% of its land bank in the Chengdu-Chongqing Economic Zone in western China, priced its IPO at 6.5 times 2010 earnings and a 54% discount to NAV.

Sunac is expected to launch its roadshow by the middle of next week. 

Other companies that could push out an IPO before the holiday season include Resourcehouse, an Australian coal and iron mining company which has done about three weeks of investor education by now but has still not set a timetable for the offering. It is seeking to raise about $2.5 billion. Two others are China Pacific Insurance and Russian aluminium producer Rusal, which are each hoping to raise well above $1 billion. Rusal went before the Hong Kong listing committee last night and will return next week for a follow-up.