Chinese real estate agent reduces IPO size but trades up

IFM Investments, which holds the China franchise for the Century 21 brand, was forced to reduce its offering price range by 20% at the low end last week to get its US initial public offering out the door. The existing shareholders who had planned to sell approximately 4.16 million American depositary shares (ADS) also withdrew their shares from the offering, cutting the size of the deal from 16.65 million ADS to 12.49 million.

The deal was in the market at a challenging time with significant selloffs in secondary markets globally, muted appetite for IPOs and speculation that China will continue to tighten property market regulations to calm speculative transactions and that it is also preparing to tighten monetary policy. The central bank has already moved to limit the liquidity available in the banking system by raising the reserve requirement for lenders.

However, after pricing its reduced offering at the bottom end of the new price range of $7 to $8 to raise $87.4 million, IFM Investment, which is commonly known as Century 21 China Real Estate, traded up slightly in its debut last Thursday. The stock added 4.3% to close at $7.30 and after dipping to $7.18 in regular trading on Friday, it again rose in after hours trading to $7.42.

Market watchers noted that the reduced price range widened the discount versus E-House (China) Holdings, another Chinese real estate services provider that is listed in the US, to more than 40%, making the newcomer relatively more attractive. At the final price of $7, Century 21 China is valued at 7.8 times projected 2010 earnings, compared with just over 12 times for E-House. E-House fell 4.1% during Century 21 China's roadshow and fell 0.9% last Thursday.

The Dow Jones index dropped 4.2% between the filing of Century 21 China's deal details and the pricing, and in Shanghai, the market was off 5.9%.

According to a source, there was very little slippage in the order book after the price and size reduction. Investors who were already in, stayed in -- although some did reduce the size of their orders -- and some additional investors joined the deal. The deal had initially been scheduled to price after the close of New York trading last Tuesday, but was extended by one day and finally priced after the close on Wednesday. The reduction of the deal size and the price range was announced only on that last day, suggesting that the company tried as long as it could to get a book together at the original terms.

Century 21 China sold the same number of ADS as it planned from the beginning, which translated into about 27.3% of the enlarged share capital. Each ADS equals 15 common class A-shares. It may also sell up to 1.87 million additional shares if the 15% overallotment option is exercised. Previously the overallotment option was to be made up of secondary shares provided by the two selling shareholders -- Goldman Sachs Strategic Investments (Asia) and a New York-based investment fund owned by Avenue Asia Capital Partners. But since they have decided to hold on to all of their shares for now -- they are subject to a six-month post-IPO lockup -- the company got a chance to boost its proceeds by issuing more new shares, albeit at a lower price.

Before the reduction of the number of shares, and at the original price range of $8.75 to $10.75 million, the total deal size could have been as much as $179 million and the company could have raised up to $134 million.

Goldman owns 20.6% of the company after the IPO, while Avenue has a 19.3% stake, making them the single largest shareholders after company founders Donald Zhang and Harry Lu, who control 37.9%. Zhang is currently chairman and CEO, while Lu acts as vice-chairman and president.

Goldman was also one of the bookrunners for the deal together with Morgan Stanley.

Beijing-based Century 21 China provides brokerage and mortgage services with a focus on China's fast-growing and highly fragmented secondary market. It also grants regional franchise rights for the Century 21 brand to regional sub-franchisors in China, which in turn open their own sales offices or grant third parties the right to open sales offices within their specific region. It currently has a network of 1,000 sales offices covering 34 major cities. As of September 30, 2009, it had approximately 4.7 million property listings, it said on its website.

The company sees significant growth opportunities as the secondary residential property market in China is still at a relatively early stage of development, despite growing significantly in recent years due to a pickup in the turnover rate for existing homes as well as increasing home inventory. The ratio between secondary and primary residential property transaction volumes in the first half of 2009 was only 1.3 times in Beijing and 1.94 times in Shanghai, compared to 13.15 times in the US and 5.16 times in Hong Kong.

Century 21 China's total revenue more than doubled to Rmb443.7 million ($65 million) in the nine months to September 2009 from Rmb208.9 million in the same period in 2008. The company also swung to a net profit of Rmb88.3 million in that same nine-month period after posting losses of Rmb72.8 million in 2007 and Rmb131.9 million in 2008.

Home prices in China's major cities doubled last year as record lending and spending relating to the government's stimulus programme spurred a surge in the world's fastest growing economy. Consequently, the country's property brokerages and agents are also growing and expanding their networks.