Dalian Wanda Commercial Properties, which aims to be one of Hong Kong’s largest IPOs in recent years, is attempting to come to market at one of the most challenging times for China’s real estate markets.
Despite the government’s efforts to stimulate China’s property market, it continues to struggle. Home prices in China fell 0.3% in August from the previous month, and although nationwide housing prices are up 4% year-on-year, it was the fifth consecutive monthly drop, according to real estate services firm E-House China.
Slowing sales, construction dropping off and banks becoming more cautious about lending have all contributed to a paltry year for the China’s real estate sector. Beijing introduced restrictions on second and third home purchases, higher down payments on mortgages and tightened credit for property developers.
This could prove to be a challenge for Dalian Wanda Commercial Properties, which aims to raise up to $5 billion in an initial public offering. If successful, the unit of Chinese billionaire Wan Jianlin’s Dalian Wanda Group will become Hong Kong’s largest IPOs since Glencore raised $10 billion in an IPO in 2011 and AIA Group secured $20 billion in 2010.
The real estate market accounts for 16% of the GDP, meaning that any downturn in China’s property market would have an adverse effect not just on the housing sector, but on the entire economy.
“Inventories are at very high levels. [Developers] are suffering price pressure as well, which brings profitability into question,” Christopher Yip, director of corporate ratings Asia Pacific at Standard & Poors, told FinanceAsia. “Apart from that, [developers] bought quite a lot of land last year, so now they need to develop [and start construction]. If sales are slower than their development schedule, it creates a larger need for funding.”
Although Dalian Wanda Commercial Properties did not outline what it plans to use proceeds for in its A-1 filing, some of the money raised will undoubtedly go towards development and construction.
Outlook
Despite declining sales this year — Dalian Wanda’s net sales totalled Rmb23.3 billion ($3.8 billion) for the first half of the year, a 27% drop from Rmb31.8 billion in the same prior year period — and negative sentiment towards real estate in general, sources argue that Dalian Wanda’s sheer size may help it raise the funds necessary to float its shares later this year.
Analysts forecast sales to improve in the second half on the back of more favourable conditions. This spring the government began taking action to prevent a crash by urging banks to offer more mortgage financing to first time home buyers. It also began allowing equity issuance to developers.
“The real estate market in China experienced a substantial slowdown this year, which has prompted ... relaxed policies by local governments in many cities, resulting in a moderate recovery in transaction volume,” said Xin Zhou, E-House’s co-chairman and CEO.
Bigger is better
The players that will benefit the most? The big ones. And this includes Dalian Wanda, which is China’s second largest commercial property owner and operator, and one of the country’s largest luxury hotel owners.
“The whole market has a stable but negative bias. But it’s slightly better for bigger players,” notes Yip. “They have better access to funding, both onshore and offshore, which gives them some advantages. Some smaller players will suffer.”
The peak buying season is September and October, with developers’ promotions and lower prices aimed to attract home buyers into the market.
It will also prove to be an ideal time for developers to snap up land cheaply, offering opportunities for Dalian Wanda. The issuer claims to be China’s only national commercial property developer — it has 178 property projects in 112 cities across 29 provinces in the mainland. One source describes it as “the bluest of the blue chips”.
Despite most analysts agreeing the second half will be an improvement on the first half, most are on consensus that sales will be down for the full year compared to 2013. “In particular, we expect leverage will remain high and profit margins will be compressed,” Kaven Tsang, vice president and senior analyst at Moody’s Investors, told FinanceAsia.
IPO details
Dalian Wanda, which filed its application proof with the Hong Kong Exchange Tuesday night, aims to raise between $4 and $5 billion under the joint leads of CICC and HSBC.
The filing did not provide details of how many shares will be on offer, what the indicative price range is, or give a timeline, although the IPO could happen by year-end.
Despite the 27% decline in first half sales, annual sales have steadily increased over the past three years, totalling Rmb86.8 billion in 2013, compared with Rmb59.1 billion in 2012 and Rmb50.8 billion in 2011, according to its filing.
Dalian Wanda purchased movie chain AMC Entertainment Holdings in 2012.
Comps
Although Dalian Wanda’s size prevents it from having direct comparables, there are a number of peers, including China Overseas Land & Investment and China Vanke.
China Overseas Land & Investment is trading at 7.75 times its 2014 earnings, while China Vanke is trading at 7.06 times its 2014 earnings. Performance for the two property developers is varied — shares in China Vanke are up 8% so far this year up to September 17, and China Overseas Land & Investment is flat year-to-date.
Dalian Wanda Commercial Properties is the parent of Hong Kong-listed Wanda Commercial Properties, which is down 29% year-to-date and is currently trading at 22.63 times its 2014 earnings, according to Bloomberg.
Raising capital
Dalian Wanda Commercial Properties is the latest developer seeking to tap equity capital markets to raise cash.
Shui On Land, the flagship property developer company of Chinese firm Shui On Group, raised HK$4.1 billion in a rights issue in March 2013, while Hong Kong’s New World Development held a rights issue this past March, with the company using the proceeds to take its New World China Land unit private for $2.4 billion.
And Country Garden, China’s seventh largest property developer and controlled by the mainland’s wealthiest woman Yang Huiyan, now seeks to raise HK$3.2 billion in a rights issue to pay down its debt.
