According to bankers, the deal will also be the largest private sector offering from China since Semiconductor Manufacturing International (SMIC) raised $1.8 billion in March 2004 with the help of Credit Suisse and Deutsche Bank. And it will be the largest IPO in Hong Kong so far this year, exceeding China Agri-IndustriesÆ $410 million offering by more than three times.
Country Garden could raise as much as HK$12.9 billion ($1.7 billion) if the offering is priced at the top of the range. The Guangdong-based real estate developer, which starts the institutional bookbuilding today (March 29), is brought to market by Morgan Stanley and UBS.
The price range has been set at between HK$4.18 and HK$5.38, sources said yesterday.
This would value the deal at a 2007 price-to-earnings multiple of 16.7 to 21.3 times or a 2008 multiple of 11.7 to 15 times, based on the mid-point of a series of earnings assumptions made by UBS, the sources say.
Morgan StanleyÆs slightly lower earnings estimates result in a marginally higher 2007 P/E ratio of 17 to 21.9 times, while its 2008 valuation comes to 13.4 to 17.2 times, they say. However, the US investment bank prefers to value Country Garden (and the rest of the Mainland property sector for that matter) on a net asset value basis and when applying its end-2007 NAV estimate to the indicative price range one comes up with an 8% discount to NAV at the bottom of the range and a 12% premium at the top.
NAV is traditionally used to value property companies because of their typically large land bank assets and the cyclical nature of their earnings, but recently there has been a shift in favour of P/Es û especially with regard to the Mainland developers. UBS argues that Country GardenÆs quick turnaround of land and high earnings growth does make a P/E valuation more appropriate.
Whichever way you look at it, though, the deal appears quite pricey compared with some of its sector peers at the upper end of the price range, even though Mainland property stocks have seen a run-up in their share prices over the past three weeks. Some of the gains are believed to be the result of Country GardenÆs offering having refocused investorsÆ attention to the sector.
NAV valuations vary widely, however. Agile Property, which is also based in Guangdong province, trades at a discount to its projected NAV of just under 30%, while Shimao Property and Shanghai-listed Vanke trades at discount slightly below 20%. China Greentown is quoted at a 10% discount.
One banker earlier argued that given Country GardenÆs strong market position, strong earnings growth and quick asset turnaround is would be ôreasonableö to see the company trade at a small premium to NAV. However, it is less clear whether investors would be willing to pay a premium for the IPO.
The stock doesnÆt look cheap on a P/E basis either with Agile currently trading at a 2007 PE multiple of 14.6 times, Shimao at 18.2 times and China Greentown, which is similar in terms of its type of developments but smaller in scale, at 10.3 times. Looking ahead to 2008, AgileÆs multiple falls to 11.5 times, while Shimao is valued at 12.6 times and Greentown at 8.7 times.
Sources say the initial response to the deal during pre-marketing has been positive as investors do see value towards the low end of the price range. To help investor interest along, the company has signed up a number of financial and corporate investors, who together may buy as much as one third of the deal. While final discussions are still ongoing, these investors are expected to include Temasek, Chow Tai Fook Chairman Cheng Yu-tung, Henderson Land Development Lee Shau Kee, the Kerry Group and Citic Pacific, the sources say.
In all, Country Garden is selling 15% of the company, which will give it a market capitalisation of about $9.8 billion at the mid-point of the range û larger that all other Mainland developers listed in Hong Kong.
The share offer consists of 2.4 billion new shares plus a 15% greenshoe. Ten percent of the deal is earmarked for Hong Kong retail investors although this could increase to 20% in case of strong demand.
The company specialises in the development of landscaped village-style residential hubs at the outskirts of cities that provide ample living space and natural greenery. The developments, which are targeted at middle-class home buyers, consists mainly of villas and townhouses with the addition of some low-rise apartment buildings as well as supporting infrastructure such as schools, recreational facilities, club houses and hotels.
The homes are popular with the public because the company tends to sell them at affordable prices and doesnÆt û like many other developers - deliberately withhold units in anticipation of price increases down the road. This also leads to a quick turnaround of the land, which enables the company to free up cash that it can plough into new projects. This, the report states, is a key reason for the companyÆs high growth rates over the past few years.
Country Garden has the fourth largest land bank among the Chinese developers behind Shanghai-listed Vanke, Agile Property and Shimao Property. Of the total 18.8 million square metres, a massive 13.3 million sqm (or 71%) is available for future developments and syndicate analysts expects the company to acquire another 5 million sqm of land this year to support its fierce development pace.
Given the companyÆs focus on townhouses and villas it should be quite exposed to government measures aimed at reducing the construction of this type of housing in particular. One requirement states that 70% of new housing developments needs to consist of units below 90 sqm in size. The aim is to ensure there are affordable housing available to meet increasing demand from the rapidly growing middle-class, but this doesnÆt fit in with the companyÆs current strategy.
However, people familiar with the company note that these measures are primarily targeted at developments within the city centres, while Country GardenÆs developments are all located in the suburbs where land is cheaper and the authorities tend be more flexible in their interpretation of the governmentsÆ austerity measures.
Still, there is always a risk that this could change.
Country Garden is currently 70% owned by 25-year-old Yang Huiyan, who is the daughter of the companyÆs founder and present chairman, Yeung Kwok Keung. The remainder is owned by four other executive directors.
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