According to sources, the deal size is now expected to range from HK$5.56 billion to HK$6.20 billion ($715 million to $797 million) pre-greenshoe. This is still well below the up to $989 million the Mainland developer was targeting in mid-June before it called off the deal because of difficult market conditions. But it is significantly higher than the $550 million to $650 million talked about at the beginning of the pre-marketing period.
What has changed, according to people familiar with the offering, is existing shareholders have decided to sell more of their combined holdings than expected as they have grown more comfortable with the current market situation. Earlier concerns that the measures imposed by Beijing in June to curb property speculation would have a negative impact on the sector havenÆt materialised and share prices of other Hong Kong-listed Chinese developers have resumed their upward trend.
ôThe valuation is also not too different from last time and if [the financial shareholders] donÆt sell now, they will have to adhere to a lockup for six months,ö says one observer. ôMost of these investors have been with the company for almost three years and have made a fair amount of money. [The IPO] is an obvious way to cash in some of those gains.ö
The IPO is jointly arranged by Deutsche Bank, HSBC and JPMorgan.
To allow all the shareholders who wished to sell an opportunity to do so, the company has trimmed the number of primary shares in the offering to about 48% of the total from about 70% in the previous listing attempt. Because of the smaller issuance of new shares, the IPO will now account for about 28.5% of the total outstanding share capital (depending on the final price), compared with a suggestion last week that it would be closer to 20%.
According to one source, the Shanghai-based developer will offer 1.16 billion shares when it launches its formal roadshow and bookbuilding today. Of the total, 556 million will be new and 602 million will be secondary shares. 10% of the total offering has been earmarked for Hong Kong retail investors, with a possibility to increase to 50% in case of strong demand. There is also a 10% greenshoe that could boost total proceeds to $877 million.
The price range will be HK$4.80 to HK$5.35 per share, which is well below the HK$5.60 to HK$7.55 that was placed on the shares in June.
Because the deal size will be smaller, the companyÆs post-money net asset value will also come down and on a discount to NAV basis, so the pricing is actually not too dissimilar to last time if you look at the wide end of the range.
The current price range values the company at a 30%-35% discount based on syndicate research, while back in June the discount range was 13%-30%. Given the market conditions at the time most investors looked only at the widest end of that range, however, which was similar to their response to other Mainland property IPOs. Shimao Property priced its $480 million offering at the low end of its indicative range for a 46% discount to NAV, while China GreentownÆs IPO, which came a week later as global equity markets had started to rebound, got away with a mid-point pricing for a 30% discount to NAV valuation.
A strong performance by Mainland property plays over the past couple of months has meant that NAV gaps have been narrowing and syndicate analysts now estimate the average discount to NAV among Shui OnÆs peers to be around 20%.
On a price-to-earnings basis, the price range translates into a 2006 multiple of 14.1 to 15.4 times, based on the companyÆs own projection that it will achieve a net profit of Rmb1.45 billion ($183 million) this year.
Because of Shui On LandÆs sizeable land bank and multi-year development profile, analysts argue that a PE valuation doesnÆt capture the whole picture. That said, the valuation is at least close to that of similarly asset-heavy nationwide developers such as China Vanke and China Overseas Land, which trade at about 15 times and 17.3 times this yearÆs earnings respectively.
Shui On is quite a unique developer in that it tends to work with local governments to redevelop entire city sections into modern communities. Its ongoing projects have a development horizon that stretches out to 2014. In recent years it has built a name for itself primarily through its Xintiandi commercial and residential development in Shanghai and it is currently working on six large-scale urban projects that aim to re-develop and modernise run-down areas in four cities.
The net proceeds will be used to fund ongoing and future developments.
The company is part of Hong Kong property tycoon Vincent LoÆs Shui On Group, which will hold about 55% of the company at the time of listing.
The seven selling shareholders, who will be offloading shares they receive following a compulsory conversion of preference shares in connection with the IPO, include Asia Real Estate Income Fund, Ocean Equity Holdings and Standard Chartered Bank (Hong Kong). Most of these will be selling only part of the holdings.
Of the original financial investors, only Value Partners has elected not to sell any shares during the IPO, according to a source.
The source adds that institutional investors have already submitted orders for the deal even though the official bookbuilding doesnÆt start until today, suggesting there will be better momentum in the book this time around.
ôPeople know the story well and the market is quite good at the moment so there is really no reason why it shouldnÆt go okay,ö says one observer.
The final price will be determined on September 27 and the trading debut is scheduled for October 4.
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