First Chinese developer to go public in 2010 raises $201 million

After a three-day delay, sources finally confirmed yesterday that China SCE Property Holdings will become the first Chinese developer to list this year. The Fujian-based company raised HK$1.56 billion ($201 million) after pricing its initial public offering at the bottom of the indicated range and will start trading in Hong Kong on Friday.

Market talk suggested the deal was thinly covered and included few major institutional investors, which was perhaps not too surprising given the glut of Chinese real estate companies that have come to market in the past three months. There has also been ongoing speculation that Beijing will take further action to limit the rise in property prices and that China may soon start to raise interest rates.

The marketing of the deal coincided with a prolonged losing streak in the Hong Kong stock market (partly caused by fears of monetary policy tightening). By the time SCE Property closed its order books last Friday the Hang Seng Index had fallen in 12 of the past 14 trading sessions and it lost 7% during the company's two-week roadshow. Other Chinese property stocks in Hong Kong were also under pressure.

However, sources said the institutional tranche attracted international demand -- predominately from Asia -- and added that, contrary to rumours in the market, the so called "friends and family" portion of the transaction was no larger than for the typical China real estate deal. The demand included long-only investors, but was skewed towards hedge funds.The deal also attracted the minimum required 100 institutional investors, although indications were that there was hardly any margin to play with. The retail tranche, which accounted for 10% of the offering, was 2.7 times covered.

Whether this demand will be enough to keep the stock above issue price when it starts trading remains to be seen, but if the earlier Hong Kong listings this year are anything to go by, the debut could be tough -- especially if the broader secondary market remains choppy. Rusal, the Russian aluminium producer that was the first major company to list in Hong Kong this year, lost 8.6% in its first day of trading last week and has fallen in each of the four sessions since. It is currently down 13.4% from its IPO price. Mongolia-based coal miner SouthGobi Energy Resources dropped 11.1% in its debut last Friday but has since recovered slightly and yesterday closed 7% below the IPO price.

The orders for SCE Property included a lot of price sensitivity (hence the bottom-end pricing), which suggests that investors had already decided that the value of this stock lay towards the low end of the indicated valuation.

However, the large participation of "friends and family" and the limited number of retail investors in the book may actually help as the former are less likely to sell in the first few days and the selling pressure from retail investors won't be that strong.  

SCE Property sold 600 million new shares, or 21% of its enlarged share capital, at a price of HK$2.60 apiece. They were offered in a range up to HK$3.30. There is a 15% greenshoe that could increase the free-float to 24.2% and the total proceeds to $231 million.

The final price values the company at 5.5 times projected earnings for 2010, on a post-money basis, and at a 54% discount to net asset value, also on a post-money basis and including land assets for which SCE Property already holds the full titles. Similarly sized regional developers like Greentown China Holdings, KWG Property and Shui On Land, trade at a discount to NAV of 30%-40% plus.

SCE Property focuses primarily on high-end residential housing. Being based in Fujian, it sees growth potential related to the continuing improvement in cross-strait relations between China and Taiwan. Fujian province is located on the east coast of China, just across from Taiwan, and has become the first port of call for many Taiwanese people setting up businesses in the mainland.

The IPO was arranged by CCB International, Deutsche Bank and Macquarie.