Greentown grabs last opening to launch IPO before summer break

Greentown China Holdings has decided to go ahead with its initial public offering, grabbing the last window of opportunity before the end of the second quarter, according to a source familiar with the decision.

The mainland property developer, which will be brought to market by JPMorgan and UBS, will launch a formal road show today (June 26) and has set a very wide price range to give itself maximum flexibility to respond to the still volatile equity markets.

The company is looking to sell 325 million shares at a price between HK$6.57 and HK$9.86 for a total deal size of up to HK$3.20 billion ($413 million). At that price Greentown will be valued at 6-9 times its projected 2006 earnings, the source says, noting that this would compare with about 9.5 times for residential developers Guangzhou R&F Properties and Agile Property, which are viewed as key comparables because of their similar regional focus.

Based on syndicate research estimates, the same price will also pitch Greentown at a 20-43% discount to its net asset value. That is in line with fellow listing candidate Shimao Properties, which will be wrapping up its $480 million to $650 million IPO this week.

Greentown is offering 25% of its enlarged share capital, with 23% being primary shares and 2% secondary shares. There is also a 15% greenshoe of all primary shares, which could boost the total deal size to $475 million.

Ten percent of the offer will be set aside for retail investors in a public offering that will kick off on Friday (June 30). That is the very last day it can launch if it wants to avoid having to update its end-December financials as under Hong Kong regulations, a companyÆs financial data cannot be older than six months at the time the public tranche is opened for subscription.

Failing to launch before the end of June would likely have delayed the offering by at least one month and probably more as most issuers typically also want to avoid the summer lull when many potential investors are off on holidays.

To compensate partly for the compressed roadshow and bookbuilding, GreentownÆs retail offering will run for 4.5 days compared with the usual 3.5 days. This means the entire offer will close the following Thursday (July 6) with the price expected to be fixed a day later. The trading debut is tentatively scheduled for July 13.

Greentown is based in Hangzhou, the capital of Zhejiang province, and currently derives most of its revenues from this region, which is one of the richest provinces in China. The proportion of earnings from these areas will decline going forward, however, following land acquisitions for developments in other areas, including Beijing and Shanghai. It also has residential projects in second tier cities like Hefei in Anhui Province, Changsha in Hunan and Urumqi in the Xinjiang Uygur Autonomous Region in northwestern China.

The company has a sizeable land bank of 8.6 million square metres that was acquired at low cost and counts as one of its key advantages versus other mainland developers. Other selling arguments for the IPO, according to sources, are its high earnings visibility, gross and net profit margins at the high end of industry averages and a strong brand name that is associated with quality, a green environment, social responsibility and an ethical corporate culture.

The focus is on residential projects, including villas, low-rise three to five storey apartment buildings and high-rise apartment buildings û all targeted at mid- to high-income earners. The developments are typically equipped with clubhouses, grocery stores, schools and sporting facilities.

With the bulk of this yearÆs anticipated revenues already locked in through pre-sales, the company is forecasting a 2006 net profit of just under Rmb1.5 billion û a 136% gain from last yearÆs Rmb623 million.

Some analysts and fund managers are concerned that GreentownÆs focus on the high end of the market could leave it vulnerable in the short-term, however, as such developments are exactly what the government is targeting in its efforts to reign in price increases driven by speculators while at the same time ensuring there is enough housing supply to cover the needs of the low-income earners.

The CompanyÆs chairman, Song Weiping, owns 52% of the group pre-IPO and his wife Xia Yibo holds 7%. Executive vice chairman and general manager Shou Bainian owns the 39%, while Stark Investments and JPMorgan each holds 1%.

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