HSBC has successfully priced a $121.92 million IPO for Beijing Capital Land at the top end of its HK$1.30 to HK$1.68 indicative range. With the 564.63 million share deal reportedly oversubscribed even before it was formally launched, it not surprising that books closed 10 times oversubscribed on the institutional side and seven times on the retail side.
Observers add that the 10% plus orders alone covered the entire book, leaving the lead with the headache of how to allocate meaningful amounts of stock in a small deal to enough accounts. Just over 150 accounts are said to have participated in total, with 15 orders received for more than 10% of the deal.
Pre-greenshoe, institutional accounts took 59.1% of the deal and retail investors 10% of the deal, with one strategic investor (GIC Real Estate) allocated a further 28% and one corporate investor (Beijing Enterprises) 2.9%. A stake of 35% of the company's issued share capital was sold, split between 513.3 million primary shares and 51.33 million secondary shares.
There is also a 15% greenshoe, potentially lifting proceeds to $140.2 million. This will leave the government with a 56.7% stake, Yieldwell International with a 4.9% stake and 38.4% in freefloat (including GIC and Beijing Enterprises).
By geography, observers say the book split 40% Asia, 30% Europe and 30% US. By investor type, 50% of the book represented tier 1 accounts and was dominated by both pan Asian mutual funds and HK/China country funds flooding back into a post Sars rally..
As one banker comments, "We're in the middle of a liquidity driven rally and investors need access to stock. This company benefited from a situation where funds have been underweight China/HK and are looking to re-balance. They saw a stock with value and decided to go for it."
One of the reasons why the deal proved popular is that the valuation is not quite as demanding as it first appears. At the top end of the range, syndicate research prices the deal on a consensus discount to Net Asset Value (NAV) of roughly 44%. This is a lot more aggressive than the secondary market trading levels of comparables such as Beijing North Star and China Resources Beijing Land, which have both rallied since mid-April, but are still trading at discounts of 50% to 60%.
However, China property experts say the calculations underlying Beijing Capital's NAV are extremely conservative, partly in deference to the problems associated with other Chinese property plays, which conducted their IPOs back in the mid 1990's on extremely aggressive valuations that were subsequently called into question.
Investors are also said to have looked at the company on a p/e basis, although this was far more of a secondary consideration. Based on FY03 earnings, the deal was priced at 11.78 times, pro forma, fully diluted.
One of the main problems investors have consistently found hard to grapple with when dealing with the Chinese property sector is the lack of a land bank and the land premium developers have to pay to acquire sites. This has meant being forced to value companies on earnings rather than the standard NAV and investors' reluctance to do so was one of the chief reasons why P-chip Shanghai Forte ran into problems back in March.
Beijing Capital is seen as something of a hybrid in this respect since it does have a land bank comprising 3.3 million square feet (fully developed) and incorporating 27 projects.
But as one analyst explains, "In China, developers don't actually buy land in the way we're used to. They negotiate a deal from the landowner to sell them the land and they might pay for the first phase of development, but not the whole lot. This means that their future development potential is uncertain, as they do not actually have their mits on the land until they pay the premium. And we all know there can be plenty of slip between cup and lip."
In its prospectus, Beijing Land says that, "In general, we are only able to pre-sell our developments after we have obtained a temporary land use rights certificate, which requires 40% of the land premium to be paid and at least 25% of the developments costs have been incurred."
But one of the chief selling points of the deal was said to have been the comfort investors took from the group's ultimate parent, the Beijing municipal government. Mainly this is because investors hope the government will place the group in an advantageous position where new contracts such as the Olympic village are concerned.
However, the Capital group is also said to have provided Beijing Capital with a series of non-interest bearing loans that will cover 70% of the financing it needs for payment of land premiums over the next two years. Indeed, the company is not highly geared by the standards of Chinese property companies, reporting a net gearing level of 68% at the end of April. The prospectus also says that of the company's total Rmb2.95 billion ($356 million) debt, Capital group companies extended 47.7% of the amount.
In addition to the company's close political connections, observers say investors were also re-assured by the presence of GIC and the due diligence it must have conducted.
A final added bonus was the dividend payment, a rarity among Chinese property companies. The company has said that it will maintain a 20% pay-out ratio, equating to a yield of about 2.5%.
Shares will begin trading on Thursday.