Greentown prices IPO at mid-point amid improving markets

In another sign that confidence is returning to the equity markets, Greentown China Holdings on Friday (July 7) priced its initial public offering at the mid-point of the range after sources said the institutional part of the deal was seven to eight times covered.

The shares, which were offered in a range between HK$6.57 and HK$9.86, were sold at HK$8.22 each for a total deal size of HK$2.67 billion ($344 million).

A pickup in the secondary markets over the past week amid a growing belief that US interest rates are close to the peak and wonÆt pose a threat to economic growth, was seen to have underpinned the strong interest in Greentown. At the same time, earlier concerns about a negative impact on mainland developers from government measures to control the allocation of land and mitigate excessive price increases seem to have eased off somewhat.

Such concerns weighed heavily on the planned IPO of Shui On Land and contributed to the issuerÆs decision one day before the books closed to postpone the $1 billion deal until markets become more stable. The Hang Seng Index has bounced 4.1% since Greentown launched its roadshow on June 26 and is up 8% since hitting a 2006 closing low of 15,234 on June 13 û the day before Shui On decided to pull its offering.

As the share price of other mainland developers rose during the offer period, GreentownÆs valuation range became more attractive and a good trading debut by Shimao Property Holdings last Wednesday û it gained 5.6% - also helped draw last minute orders, especially from retail investors, market watchers say.

The final price values Greentown, which was brought to market by JPMorgan and UBS, at 7.5 times its projected 2006 earnings and at a discount of about 30% to its estimated net asset value. This compares with its two key comparables, Guangzhou R&F Properties and Agile Property Holdings, which trade at 2006 earnings multiples of about 10-11 times.

The average discount to NAV among Hong Kongûlisted mainland developers ranges from 25-30% based on consensus forecasts, analysts say. Shimao, which completed its $480 million IPO one week before Greentown, was priced at the bottom of its indicative range for a 46% discount to NAV and at 11.6 times this yearÆs forecast earnings.

According to one source, price sensitivity set in at a PE ratio of about 8 times, but at the mid-point where it was priced the Greentown offering was very well covered. About 120-130 institutional investors were said to have participated.

Among them were a couple of large private equity houses which submitted sizeable orders in the early part of the roadshow. Their interest set the deal off to a good start and helped build momentum.

The 10% retail tranche was about 11 times covered, which wasnÆt enough to trigger any clawbacks but a clear step-up in terms of demand from a week earlier when the retail portion of ShimaoÆs IPO was only a little more than half covered.

ôThe market has definitely improved and people are getting more confident again, but GreentownÆs story is also simple to understand,ö says one observer, noting that the developer pre-sells most of its properties before they are completed, which gives it good earnings visibility.

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.

Other selling arguments for the IPO, included gross and net profit margins at the high end of industry averages and a well-known brand name that is associated with quality and social responsibility.

Greentown has a land bank of 8.6 million square metres and focuses primarily 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.

Its base is in the Zhejiang province, which is one of the richest provinces in China, but the developer has been branching out and now has residential projects in both Beijing and Shanghai, as well as in second tier cities like Hefei in Anhui Province, Changsha in Hunan and Urumqi in the Xinjiang Uygur Autonomous Region.

The company sold 325 million shares, of which 92% were primary and 8% secondary. The latter shares were sold by Chairman Song Weiping, his wife and the executive vice chairman, who are the largest shareholders of the company. There is a 15% greenshoe of all primary shares, which could boost the total deal size to $396 million.

The proceeds will go mainly towards the development of ongoing projects, but $65 million will be used to redeem the mandatory conversion tranche of a $130 million pre-IPO convertible bond that was issued by the company in January.

The CB was arranged by JPMorgan, which bought 31% of the issue, and according to sources the US investment bank also got 70% of the economics of the IPO. UBS, which was joint global coordinator and joint bookrunner, received about 30%, they say.

The remaining 69% of the CB was bought by Stark Investments. The $65 million non-mandatory-conversion tranche can be converted into shares six-months after the listing at a price equal to 104% of the IPO price.

GreentownÆs trading debut is scheduled for July 13.

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