Franshion is offering 1.41 billion new shares, or 30% of the enlarged share capital, at a price ranging from HK$1.85 to HK$2.35. It has a typical structure, with 90% of the deal sold to institutional investors and cornerstones, while the balance of 10% is earmarked for the retail tranche. A 15% greenshoe could increase the deal size to $487 million.
ôThe company owns a portfolio of high-quality assets, which include properties located in prime locations in China,ö says a source. ôIn addition, it has a close relationship with the Sinochem Corporation.ö
The company is currently a 100% subsidiary of Sinochem Corporation, a state-owned enterprise in China, which is under the direct control of the State-owned Assets Supervision and Administration Commission of the State Council. It focuses on the development, sale, leasing and management of commercial and residential properties, which are located in Shanghai, Beijing and Zhuhai.
Estimates suggest the developer will reach a net profit of HK$419 million by the end of 2007. In 2006, Franshion grew net profit by 6.7% to HK$169.5 million.
It is noteworthy that up until now FranshionÆs income has not included the rental, hotel operation and property management fee income and potential income from a string of acquisitions, which are expected to be completed by year end.
Before the IPO, Franshion agreed to acquire 75% of both Sinochem Property Management and Wangfujing Hotel Management from Sinochem for HK$826 million. The company will also buy a 50% share of Chemsunny for HK$1.4 billion. When the acquisitions are complete, the company will fully own Sinochem Tower, Wangfujing Grand Hotel and Chemsunny Plaza, which are all located in Beijing.
In addition, Franshion can exercise an option offered by Sinochem to acquire its indirect interests in Jin Mao, Shimao Investment and Shanghai Yin Hui, which hold shares in various properties and property development projects in China.
ôI think the attractiveness of the company lies in the options offered by its parent company to acquire key assets (Jin Mao, Shimao Investment and Shanghai Yin Hui), but therein also lies the risk,ö says an analyst close to the deal. ôThe prices for those acquisitions havenÆt been set yet and uncertainties remain. ThatÆs why I think the offer is expensive if it prices at the top.ö
The price range values the company at a 15%-30% discount of its net asset value pre-IPO, according to the source.
There are no real comparables for Franshion as all the listed Chinese developers have different property portfolios, according to the source, but China Resources Land may give investors some idea about the valuation as both companies are backed by strong parent companies. China Resources Land is currently trading around 2.9 times its 2006 NAV, according to another analyst.
The stock price of China Resources Land has surged by 50% since June to hit a high of HK$14.98 on July 24, but it dropped 7.8% in the following four trading days, after the Hang Seng Index shed more than 700 points during the same period. It bounced back 3.7% yesterday to close at HK$14.42
Irrespective of whether or not the offering is richly priced, a number of cornerstone investors have already reserved around 28% of the deal. Chow Tai Fook owned by Cheng Yu Tung, the chairman of the Hong Kong-listed New World Development, will purchase around 4.6% of the deal. Hong Kong-listed New World China, in which the ChengÆs family owns a majority stake, will buy another 4.6% of the total shares issued. In addition, the government of Singapore Investment Corporation, Stark Master Fund and Stark Asia Master Fund will purchase 9.2%, 7.4% and 1.8% respectively.
According to the preliminary prospectus, Sinochem will still own 70% of the company after the offering. The proceeds raised will be used for funding acquisitions as well as for developing further real estate projects. Deutsche Bank is the sole bookrunner.
The final price is expected to be set on August 10 and the trading debut is scheduled on August 17.
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