It will also be the largest of the three and with a size of between $1.3 billion and $1.5 billion, the biggest IPO in Hong Kong since investment holding company Fosun InternationalÆs $1.48 billion IPO in early July.
The initial plan was to do a deal of only about half the current size, but a combination of the companyÆs growing land bank and rising valuations at other property developers, has seen the size grow increasingly bigger over the past few months. Given the current market volatility and reluctance among hedge funds to put money to work in untested companies, this large an offering could be a bit of a challenge, but sources say the initial feedback from investors has been extremely positive.
Joint bookrunners BOC International, Goldman Sachs and Morgan Stanley seems confident since they have sought and received a waiver from the stock exchange that enables them to reduce the maximum retail allocation to 20% from the usual 50%. The base offering to retail investors will be the usual 10%, but if the retail tranche is more than 15 times covered the clawback will boost it to 15%, more than 50 times to 17.5% and more than 100 times to and 20% of the total.
To instil confidence among institutional investors and help create some early momentum in the book, the bookrunners have signed up 10 cornerstone investor groups, although they will only take up between 16% and 18.5% of the total deal, which is by no means excessive when it comes to cornerstone tranches. Among them are the Government Investment Corporation of Singapore, Henderson Land Development, China Life Insurance and hedge fund Och-Ziff, which will each invest $30 million. The other six will each buy $20 million worth of shares, resulting in a total cornerstone tranche of $240 million, sources close to the offering say.
Sino-Ocean has a strong position in the Beijing market, but the real reason why the cornerstones û which are said to include several Hong Kong property tycoons - are interested in this company is its expansion into the so called Pan-Bohai Rim. This area includes Beijing as well as major second tier cities Tianjin, Dalian and Shenyang in the northeast of the country and is expected to become the next zone in China to see substantial economic growth thanks to extensive government support.
In 2005-2006 the Pan-Bohai Rim recorded 14.3% growth in disposable income, which was higher than the 13.6% in the Yangtze River Delta and the 7.6% rise in the Pearl River Delta, suggesting strong growth momentum. This is expected to result in property prices rising faster in this region than in other areas in China.
ôThe region is extremely attractive as it has lots of consumers that are able to afford to buy Sino-OceanÆs products,ö one observer says of the Pan-Bohai Rim.
About 90% of the companyÆs current assets are located in this region, which gives it a bigger footprint here than any other developer. Established in 1993 as a real-estate subsidiary of the Cosco Group, which is supervised directly by the central government, Sino-Ocean also has strong relationships and good connections with both the central and local governments that will help it succeed in this area, analysts believe. This will be particularly important when it comes to sourcing new land, they say.
The Sinochem Group, which is another large SOE, became a major shareholder alongside Cosco in 2002 and in 2006 six financial investors bought a combined 30% stake and the company has been restructured as a red-chip. A seventh company that Sino-OceanÆs CEO Li Ming has an option to buy 49.9% of, acquired 8.4% at the same time.
The six financial investors include Morgan Stanley, Standard Chartered Bank, Merrill Lynch and Credit Suisse, which have invested through various real estate or private equity funds, and domestic investment funds International Finance Real Estate (IFR) and Talent Ocean. Neither of these will sell any shares in the IPO.
Sinochem has been forced to sell part of its current holdings, however, as the Hong Kong stock exchange didnÆt like the fact that its portfolio of companies also include another property developer, Franshion Properties, which listed in Hong Kong in August. Sinochem and Cosco currently holds 30.8% each of Sino-Ocean, but after the IPO SinochemÆs stake will fall to 15%, while Cosco will still hold 21.6%. Sinochem will be the only existing shareholder that will sell secondary shares in the offering.
The company is selling 36.6% of its enlarged share capital, or 1.55 billion shares, of which 82.1% are new. Sources say they will be marketed in a range between HK$6.45 and HK$7.70 for a total pre-shoe deal size of HK$10.0 billion to HK$11.9 billion ($1.3 billion to $1.5 billion). Including the 15% over-allotment option, the deal could increase to up to $1.76 billion.
Based on the consensus forecasts by the three bookrunners, the price range will result in a blended 2008 price-to-earnings ratio of 13.5 times to 16.1 times, one source estimates. In relation to net asset value, the bottom of the range translates into a discount of 7.2% while the top of the range pitches the company at a modest premium of 2.2%.
The NAV estimates vary among the banks, however, with another source noting that Morgan StanleyÆs numbers that are based on a post money, but pre-shoe NAV estimate would see the price range translate into a results discount to NAV of 18.3% to 6.9%. GoldmanÆs estimates look more aggressive, although it was unclear yesterday whether the numbers from the two banks were directly comparable.
Whichever way the deal is marketed, however, observers say it will be difficult to sell Sino-Ocean at a premium to its current NAV (with the IPO proceeds added in). So far, only one Mainland developer has succeeded in achieving a premium and that was Country Garden which came at the time of intense demand for Chinese real estate stocks in April and sold its shares at a 12% premium to its end-2007 NAV. In the current jittery market environment it would be almost impossible not to price Sino-Ocean at a discount, they say, although the sector has been undergoing a bit of a re-rating and more Mainland developers than ever are now trading at a premium to NAV even if the range still varies considerably.
Speaking for Sino-Ocean is this regard is its large market capitalisation as larger developers are typically able to command higher valuation multiples. The company also has a strong brand in Beijing that it is now trying to leverage in the second-tier cities in the region where it is active, as well as a good track record in terms of acquiring land and turning its projects around relatively quickly. It ranks as the number one developer in Beijing in terms of the amount of gross floor area (GFA) sold since January 2004.
As of the end of July this year, it had 23 projects at various stages of development, including completed projects totalling 2.3 million square metres of GFA and a land bank of 8.6 million sqm of GFA that is either under development or available for future projects. Aside from its medium- to high-end residential property projects, the company also develops and owns Grade-A office space, retail and hotel properties.
Investors are also likely to be keen on the company because of its high near term earnings visibility. One syndicate analyst argues that the company has already locked in 85% of the estimated underlying 2007 net profit through pre-sales and the disposal of the Chemsunny World Trade Centre in the first half of the year. Still, the estimates vary from about 150% growth in net profit this year to 200% growth, followed by another 24%-44% growth in 2008.
These numbers are based expectations of large quantities of apartments becoming available for sale in these two years as well as rising property prices.
Given that about 57% of Sino-OceanÆs revenues last year came from residential property sales and that much of that is geared to the upper end of the market, the company is obviously vulnerable to further government measures to cool property speculation. But the main question investors will have to ask themselves is whether they believe the government will continue to support the Pan-Bohai Rim and that whether the economic growth will really be on par with that seen in the Pearl River Delta and the Yangtze River Delta before it. If so, Sino-Ocean does seem like a good bet.
However, analysts are hedging their bets noting that hiccups are possible.
ôThere is a risk that the government may change its current policy direction, which favours development in the Pan-Bohai Rim. Any changes in policy focus could delay economic lift-off in the region and slow property market growth; in turn this would lower the visibility of Sino-OceanÆs earnings growth,ö one syndicate report notes.
Sino-OceanÆs retail offering will open on Friday (September 14) and the deal is expected to price towards the end of the following week. The trading debut is tentatively scheduled for September 29.
This offering will be followed by Aoyuan Corp, which has started pre-marketing of an IPO of about $350 million that will be led by Credit Suisse and Morgan Stanley, and Soho China, which is expected to kick off its pre-marketing today. The latter, which is also based in primarily in Beijing, is expected to raise about $1 billion with the help of Goldman Sachs, HSBC and UBS.
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