There may be talk of more austerity measures and Chinese interest rates are undoubtedly on the rise, but Mainland property developers continue to line up for listing in Hong Kong. And so far, pretty much all of them have received the red-carpet treatment.
The key to making a listing work, bankers say, is to make sure that each new listing candidate has something unique to offer in terms of its market positioning – the most recent newcomers include the first residential developer to focus on the pan-Bohai Rim (Sino-Ocean Land Holdings) and the first company to focus on the development of commercial properties to be sold in the form of strata units (Beijing-based Soho China). If a candidate falls short on this account, it needs to at least offer an attractive discount to its closest comparables.
Guangdong-based Aoyuan Property fell into the last category, but the smaller-scale developer played this to its utmost advantage and attracted $31.8 billion of institutional demand for its $467 million IPO.
The latest in-line is Zhong An Real Estate, which yesterday kicked off the institutional roadshow for an initial public offering of up to HK$3.39 billion ($438 million). Its key selling points will include the fact that the majority of its developments and land bank is in the city of Hangzhou in the Greater Yangtze River Delta region, which is one of China’s wealthiest and fastest growing areas. With 57% of its land bank and 81% of its estimated gross asset value in Hangzhou, Zhong An offers more exposure to this city than any other Hong Kong-listed developer. The closest one is Greentown China, which, according to a Zhong An syndicate research report, has about 30% of its gross asset value there. The rest of Zhong An’s land bank is in the cities of Hefei and Huaibei in the same region.
The listing candidate also enjoys strong brand recognition and sits on a low-cost land bank of 5.2 million square metres, which makes it well positioned to benefit from the long-term rise in property prices. According to the same report, its average land cost so far is only Rmb620 per sqm ($83), compared with selling prices of Rmb2,500-11,000 per sqm. The large scale of Zhong An’s projects, which gives it economies of scale, further supports this trend and syndicate analysts project its net profit will grow at a compound annual growth rate of 43% in 2008-2010 from an estimated Rmb19 million in 2007. The volume of completed units will increase significantly from next year, however, resulting in the bottom line jumping 43 times in 2008 to Rmb829 million.
The land bank is expected to sustain the developer’s production needs for at least five years, but the management’s good insights into government policies and development trends in the region – the chairman used to be a government official - should enable the company to continue to source land in primary locations at relatively low cost, the analysts behind the report say.
Zhong An is selling 27% of its enlarged share capital pre-greenshoe in the form of 543 million new shares. The price range has been set at HK$5 to HK$6.25. At the top end of that range, the company could end up raising as much as $503 million if the 15% greenshoe is also exercised in full.
The offering has the usual 90:10 split between institutional and retail investors and standard clawback triggers will apply. The latter could increase the size of the retail tranche to a maximum 50% of the total base deal in case of strong retail demand.
To help attract buyer to the deal, the company and bookrunners Deutsche Bank and JPMorgan have lined up four cornerstone investors, who have jointly agreed to buy $110 million worth of shares at the IPO price. Depending on the final price, they will take between 25% and 31.4% of the total deal. Sources say the four investors are: Chow Tai Fook, which is the private investment vehicle of New World Development Chairman Cheng Yu-tung; Starr International, an investment company owned by former AIG personality Maurice Greenberg; Chinese Estates’ chairman Joseph Lau; and Peter Woo, who is the chairman of property and retail conglomerate Wheelock & Co.
The final price values Zhong An at between 11.9 and 14.9 times its 2008 earnings, based on the consensus syndicate forecast, investors who have been briefed on the terms say. This makes it look relatively cheap compared with its some of its closest comparables which trade on average 2008 P/E ratios of about 17 times. The valuations vary quite significantly, however, from 8.2 times for SPG Land (the smallest one in terms of market value) to 24 times for Singapore-listed Yanlord. Greentown trades at about 14 times.
Looking at the valuation from a net asset value perspective, the stock is looking even cheaper with the discount to NAV ranging from 29.6% at top end of the price range to 41.5% at the bottom. P/E is viewed by many as the most appropriate way to value Zhong An, however.
The comps trade at an average 3% discount, but again the differences are huge ranging from a discount of 44% for Shanghai Real Estate to a premium of 24% for Yanlord. Greentown trades at a 14% discount.
So far the feedback to the offering has been positive, but the relatively unchallenging valuation – as well as the large proportion of the deal going to cornerstones – is likely to be a nod to the recent volatility in the Hong Kong market. The environment has also become a bit tougher in the sense that there are currently a lot of offers for investors to choose from.
Among more company specific concerns, investors would want to be aware of the execution risk as Zhong An still doesn’t have land titles for 39% of its land bank. The company has also outlined plans to expand its current residential developments beyond the three cities it is currently in and to move into the hotel business. Despite having no prior experience in hotel investments it says it aims to have five hotels up and running by 2012.
The company currently has two mixed-use commercial projects in Hangzhou, the first of which will be completed by the end of this year. It includes a five-star Holiday Inn hotel, a shopping mall, and three towers comprising offices and serviced apartments. The second one is still at the planning stage, but is expected to include 2.1 million sqm of Grade A offices, two five-star hotels as well as retail space and serviced apartments. The company plans to retain about a quarter of the total floor area as a long-term investment. This is a new area for Zhong An and in 2008 only about 4%-5% of its earnings before interest and tax is expected to come from recurrent rentals or hotel income.
The final price is expected to be set on November 7 and the trading debut is scheduled for November 13.
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