Century 21 brand operator in China seeks $179 million from US IPO

IFM Investments, which holds the China franchise for the Century 21 brand, has started bookbuilding for an initial public offering on the New York Stock Exchange (NYSE), making it the second Chinese real estate services provider to test the appetite of US investors in just over three months.

The company, known as Century 21 China Real Estate, provides brokerage and mortgage services for the secondary real estate market in China, and aims to raise between $146 million and $179 million ahead of the listing.

The Beijing-based company is offering 16.65 million new American depositary shares (ADS), each equivalent to 15 common shares, at a price between $8.75 and $10.75. The price range represents a 2010 price-to-earnings multiple of between 9.5 and 11.6, which compares with a P/E multiple of about 20 for Nasdaq-listed E-house (China) Holdings, Century 21 China's bigger domestic competitor, according to data from Bloomberg.

The offering accounts for 36% of the enlarged share capital and consists of 75% primary and 25% secondary shares plus a 15% greenshoe option. If the shoe is fully exercised, the total proceeds may increase to as much as $206 million and the number of outstanding ADSs immediately after the offering will be 19.147 million.

The bookbuilding opened last Thursday and will stay open for a week-and-a-half. The pricing is scheduled for January 26 and the stock will start trading the following day under the symbol "CTC". Goldman Sachs and Morgan Stanley are joint bookrunners of the deal.

In mid-October last year, China Real Estate Information Corp (CRIC), which is 51% owned by E-house, raised $216 million from its US IPO. The price was fixed at $12 per ADS, towards the lower end of a price range of $11.80 to $13.80. The fact the price was fixed towards the bottom of the price range helped the stock jump 18.3% in its Nasdaq debut.

Shanghai-based E-House's IPO in 2007 was also popular. The company raised $201 million after selling 14.6 million American depositary receipts at $13.8 a share, above its $11.50 to $13.50 price range. The shares soared more than 40% on debut.

After declining with the rest of the Chinese property market in 2008 and reaching a low of just $5 late that year, E-House recovered to trade, from time to time, above $20 in the third and fourth quarters last year. Since then it has retreated slightly again and on Friday closed at $16.79, or 22% above its IPO price. Meanwhile, CRIC has given up its early gains and Friday's close at $9.95 means it is currently trading 17% below the IPO price.

Even so, market watchers expect Century 21 China's share sale to meet with a good response. The demand was very good already on the first day (Thursday), and included some retail interest as well, said a source familiar with the deal.

The company, which is an exclusive franchisor of the Century 21 brand in China, will use the net proceeds partly to fund the development of its brokerage services business through select strategic acquisitions. In a prospectus document filed with the New York Stock Exchange, it said the rest will go towards: a plan to enter new cities by opening additional sales offices; investments in and upgrades of its information and operational systems; and for general corporate purposes.

While E-house targets China's primary real estate market (i.e. sales of new flats), Century 21 China focuses on the fast-growing and highly fragmented secondary market. It also grants regional franchise rights for the Century 21 brand to regional sub-franchisors in China, who in turn, open their own sales offices or grant third parties the right to open sales offices within their specific region.

The real estate agent generates revenue from its franchise services by collecting initial franchise fees as well as ongoing service fees from its regional sub-franchisors. Its total revenue increased to Rmb443.7 million ($65 million) in the nine months to September 2009 from Rmb208.9 million in the same period in 2008, representing an increase of 112.4%, according to the prospectus.

Home prices in China's major cities doubled last year as record lending and spending relating to the government's stimulus programme spurred a surge in the world's fastest growing economy. Consequently, the country's property brokerages and agents are also growing and expanding their networks.

Century 21 China has a network covering 34 major cities with 1,000 sales offices, and has about 14,900 sales professionals and staff. As of September 30, 2009, it had approximately 4.7 million property listings, the company said on its website.

The price of land for housing developments in Shanghai rose from Rmb3,393 per square metre on average in 2008 to Rmb7,230 per sqm in 2009. Sales of land for residential, commercial or industrial use are expected to have reached Rmb99.2 billion last year, 148% higher than in 2008 and 106% more than 2007, according to data from Shanghai-based property agents.