The pricing, said to be the result of there being virtually no price sensitivity in the institutional order book, was a little bit surprising given that the IPO was called off in June after being just about covered at the very bottom of the range.
The stronger reception can be seen as proof that sentiment for the Mainland property market is improving after the initial concerns stirred up by a series of government measures to reign in speculative buying in late May. A sharp sell-off in Chinese property counters in response to those concerns was cited as a key reason for Sui On LandÆs decision to postpone its listing at that time.
To be fair, the valuation for Shui On at the top end of the current range is equal to that at the bottom end back in June, but demand was definitely much more solid this time with the institutional offering between 11 and 12 times covered, according to one source.
More than 300 institutional investors signed up for shares in the accelerated offering with many of them submitting ôquite chunkyö orders of more than $50 million each. About 75% of the demand came from Asia-based accounts with the rest split quite evenly between the US and Europe. Given that the IPO had already been fully marketed back in June, the bookbuilding was reduced to seven days from the normal nine or 10.
Retail investors subscribed to about 12 times the shares earmarked for them, which corresponded to 10% of the total deal. This means Shui On will be the first Hong Kong IPO among the seven that have come to market since the summer break not to see a clawback from the institutional tranche. To trigger a clawback, the retail tranche would have had to be at least 15 times covered.
The Shanghai-based property developer, which is being brought to market by Deutsche Bank, HSBC and JPMorgan, fixed the price of the 1.16 billion shares on offer at $5.35 for a total deal size of HK$6.20 billion ($797 million). The company sold 28.5% of its enlarged share capital, which will give at market cap of HK$21.8 billion ($2.8 billion) when it starts trading on October 4.
The offer was marketed in a range between HK$4.80 and HK$5.35 per share, which valued the company at a 30%-35% discount to its 2006 NAV.
Of the total amount of shares on offer, 556 million were new while 602 million were secondary. There is a 10% overallotment option that could boost total proceeds to $877 million, if fully exercised.
The discount to NAV compares with a sector-wide average of about 28%-29%, according to one banker, which suggests that Shui On was actually sold at a slight premium if you assume a 10% IPO discount. However, valuations are extremely widespread, ranging from about a 10% discount to NAV for Guangzhou R&F Properties to 33% for Hopson Development and Beijing Capital Land, making a comparison based on averages quite academic.
Among the closest comparables, recently listed Shimao Property, which is also based in Shanghai and involved in large-scale residential and commercial developments, albeit not quite of the same scale as Shui On, trades at a 33% discount. Shimao, which is more diversified given it also counts hotel operations among its businesses, priced its $480 million June IPO at a 46% discount.
On a price to earnings basis, Shui OnÆs final price translates into a 2006 multiple of about 15.4 times, based on the companyÆs own projection that it will achieve a net profit of Rmb1.45 billion ($183 million) this year before taking into account the revaluation of investment properties and a fair value adjustment of derivatives.
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, which makes it much more of a long-term investment than some other Mainland developers which have a very quick turnaround between land acquisition and the sale of the finished property.
The longer investment horizon was seen as a key reason why Hong Kong retail investors were not so keen on this IPO and was also evident by the fact that most of the long-only funds that anchored this offering were specialist property funds.
A part of Hong Kong property tycoon Vincent LoÆs Shui On Group, Shui On Land has built a name for itself in recent years 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 Shui On Group will retain about 55% of the company at the time of listing. HSBC, which bought $100 million worth of shares in the company in June, will hold 3.6%.
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