China Central Properties completes AIM listing

The Shui On-backed company will use the $500 million raised from its IPO and a concurrent CB to buy more distressed and partially completed properties.
China Central Properties (CCP) has become the first Chinese investment company focusing on distressed and partially completed properties to list on LondonÆs Alternative Investment Market (AIM) after completing its ú151 million ($300 million) initial public offering at the end of last week.

The fixed-price offering, which is sponsored by Hong Kong-listed Shui On Construction and Materials (SOCAM), attracted more than 50 investors aside from a group of hedge funds and investment banks which had made an earlier commitment to buying ú101 million worth of the shares. More than 70% of the demand for the remaining ú50 million came from long-only funds, a source close to the deal says.

Excluding the cornerstone investors, 60% of the terest came from Asian property-focused funds and China-dedicated funds. US investors accounted for about 22% of the demand and European investors the remaining 18%. Based on the allocations, investors estimated that this portion of the deal would have been more than two times covered.

Investors are likely to have been attracted by the quicker turnaround for the types of properties that CCP will be focusing on than for the typical greenfield project. The focus on partly developed projects also means it will have lower cash flow requirements.

ôBy definition, this is a less risky business. The key is finding suitable assets,ö notes one observer.

The backing of the Shui On Group and its well-connected founder Vincent Lo, who is taking the helm as chairman at the AIM-listed unit as well, is expected to help in this respect. It is noteworthy, however, that the use of only about 10% of the money raised from the IPO and a concurrent $200 million convertible bond issue has been determined at this point.

Sources say the management did a good job during the roadshow of explaining how they are going to put the money to work and what kind of projects they will be looking at. Initially it will spend about $50 million to acquire three additional projects which will be injected into CCP at cost, meaning the sellers wonÆt be making any profit on the divestment, and it has also signed letters of intent for another $100 million to $125 million worth of acquisitions.

ôWhile these arenÆt legally binding, it shows they have targets in sight,ö one source says, adding that the management is confident that it will be able to put all the proceeds to work within the next 12-18 months.

The company sold 151 million shares, or 38.2% of its issued share capital, at GBP1 apiece with the help of sole bookrunner Deutsche Bank. There is also a greenshoe of 15%, which may lift the total size of the offering to ú174 million ($343 million). When the shares started trading on AIM on Friday the price rose to as much as ú1.0875, but slid back again and closed at ú1.01.

SOCAM bought 63 million of the shares offered through the IPO, which brought its total stake in the company to about 36% (pre-greenshoe). The remainder is held by the vendors who together with SOCAM sold the five assets to CCP that makes up its entire portfolio at the time of listing. The vendors, which include JPMorgan Special Situations Group, Spinnaker Group, Value Partners, V Ventures Group and Yida Group, were paid entirely in shares.

The initial five projects have a combined asset value of ú256 million ($500 million), as determined by Savills and have been injected into CCP at a 20% discount to net asset value. The vehicle will hold close to $200 million worth of debt, which puts the pre-IPO NAV at about $290 million.

Among the investors who have already committed to invest in the IPO or the five-year CB (or in some cases both) are hedge funds Och-Ziff and Spinnaker, which also count as cornerstone investors, CQS, Deutsche Bank, Stark and UBS. The CB will be convertible into shares of the company at a 34% premium to the IPO price.

SOCAM will retain control of the day to day operations through wholly-owned SOCAM Asset Management, which will be the investment manager of CCP.

The company will have a fund-like structure and the projects it will consider investing in will primarily include those where the owners have run out of money. But CCP may also acquire properties that are under some form of commercial distress that the Shui On Group and Chairman Lo are in a better position to resolve. Alternatively, it may buy developments where there is nothing wrong with the asset, but they still feel they can extract more value, a source familiar with the company says.

Once acquired, the projects will be upgraded and completed, and then either sold or leased.

According to the listing document, the company plans to invest in projects with a targeted internal rate of return of at least 25% on a leveraged basis, after deducting costs. The intention is that no single investment will exceed 15% of the total equity capital.

Having been listed in Hong Kong since 1997, SOCAM is a leading player within construction, cement production, property development and venture capital investments in China. It also owns a 17.8% stake in Shui On Land, which listed in Hong Kong last year and focuses on large-scale city re-development projects in China.
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