Pre-marketing began this Monday (November 14) for a $250 million to $350 million IPO by Guangdong-based property developer Agile Property. The Morgan Stanley led deal follows a similar IPO in mid-July for Guangzhou R&F Properties, which just about scraped through the primary market, but has gone on to double in secondary market trading.
The two companies share a number of similarities. Both have big operations in Guangdong province, although Agile derives almost 100% of its sales from the province, while Guangzhou R&F derives 51% from Guangdong and 49% from Beijing.
The two also have similar landbanks. Guangzhou R&F is the largest developer in Guangdong with a landbank of 5.3 million square metres and a 6.7% market share by GFA sold in 2004. Agile has a landbank of 4.8 million square metres, ranking it number five (by landbank) behind listed property developers Hopson, China Vanke, China Overseas Land and Guangzhou R&F. It also has 1.1 million square metres of property under development.
Where Agile differs from some of its counterparts is the huge brand awareness the company has in Hong Kong, where it is one of the largest advertisers on Chinese language TV. Indeed, Morgan Stanley bankers will be hoping the "Mengniu effect" comes into play where retail demand for the IPO is concerned.
Agile is said to have targeted Hong Kong property buyers almost from the outset of the company's operations in 1992. It is primarily known for building retirement and holiday homes across the border and started off based in Zhongshan, before expanding into the Guangzhou property market in 2000 and Foshan in 2001.
It is now hoping to branch out into neighbouring regions such as Hainan. All its developments are residential.
As disposable income levels have risen on the Mainland, the percentage of Hong Kong and Macau-based buyers has dropped to about 30% of the total. Average income per capita is now higher in Guangzhou than either Shanghai or Beijing, reaching RMB19,592 in 2004 compared to RMB18,503 and RMB17,116 for the other two cities.
A second differentiating factor is the stability of the Guangdong residential market relative to Shanghai or Beijing where rampant speculation and government cooling measures have made prices much more volatile. Analysts say that Guangzhou residential prices rose by roughly 6% in 2004, with true end-user demand driving the market ever since the bursting of a property bubble in the Pearl River Delta during the mid 1990's.
This is one of the reasons why Agile will try and price at a premium to Shanghai-listed property plays such as China Vanke, which tend to trade at discounts of around 50% to NAV (Net Asset Value). Fund managers say Agile has been assigned a median NAV of RMB 13 billion ($1.6 billion) by its syndicate banks, which include CLSA and Macquarie as co-leads.
Based on this figure, Agile is being pitched on a discount range of roughly 35% to 45% to NAV. Guangzhou R&F is said to be trading around a 30% discount to NAV, while Hong Kong's blue chip property developer, Sun Hung Kai is trading at a discount of roughly 10%.
In terms of P/E, Agile is being pitched on a range of roughly 7.5 to 10.2 times 2005 earnings and six to eight times 2006 earnings. Guangzhou R&F is trading at about 15 times 2005 earnings and 7.5 times 2006 earnings.
Agile's P/E valuation is based on a 2005 net profit figure of RMB960 million ($118.8 million) and 2006 figure of RMB1.2 billion ($149 million). Over the past few years, the company has seen net profit tick up considerably.
Back in 2003 it made just Rmb72 million ($8.9 million) and in 2004 RMB228 million ($28.2 million). This performance has been attributed to the fact that the company amassed its large landbank during 2000 to 2001 and is only now starting to reap the development profits.
Because it has such a large landbank, the leads will argue that the company should enjoy earnings stability over the coming years. Investors, however, will ask how easily it will be able to replenish the landbank and at what price given the fact that the Guangzhou government in particularly has been tightening land supply over the past year.
Roadshows for the IPO will start on November 25, with pricing scheduled for December 7. The transaction will have the standard Hong Kong IPO structure and combines 87% new shares and 13% old shares pre shoe.
The company is currently 100% owned by its chairman and will have a 28.75% freefloat pre greenshoe.
