China New Town hits it off with investors

The Chinese land developer chooses to list in Singapore rather than Hong Kong, and attracts almost 200 investors to its $229 million offering.
China New Town Development has priced its initial public offering in Singapore close to the top end of the range for a total deal size of S$332 million ($229 million) after attracting strong demand from institutional investors.

A subsidiary of Hong Kong-listed property developer SRE Group, China New Town is not your usual developer, but rather clears and prepares government-owned land for new town projects before it is sold to third-party residential developers. It is one of the first private companies to get into this business and will be the first listed Chinese developer to focus purely on land development, although some listed companies like Shui On Land and Shenzhen Investment are involved in this type of work as well as property development.

The actual work includes designing a master plan for the entire town project, relocating the people who might be living on the land already, and installing the infrastructure. Working closely with the local government authorities, it pays nothing for the land in the first place but receives the majority of the proceeds when the residential plots are sold on.

In addition, China New Town typically acquires land-use rights to parts of the land in the new town projects which it uses to develop commercial properties such as hotels and convention centres, which it then manages. It also enters into agreements with the local governments to build, manage and operate public amenities like museums and recreational parks.

While observers had noted that investors may find it difficult to understand the business model as there are no clear comparables and that by listing in Singapore the company may miss out on the massive pool of liquidity that is chasing Chinese property stocks in the Hong Kong market, the outcome of the IPO shows such concerns were unwarranted.

According to sources, the deal attracted almost 200 institutional investors and ended up being more than 20 times covered. The order book also had no price sensitivity. However, the management still decided to fix the price slightly below the top of the S$0.66 to S$0.86 at S$0.83 to leave something on the table for investors. The downturn in the global equity markets over the past few sessions may have played a role in that decision. China New Town closed its books last Friday after a two-week roadshow which coincided with a volatile but generally favourable secondary market, but its shares wonÆt start trading until November 14 by which time there is no telling where the market will be.

The Singapore Straight Times index has fallen 3.5% over the past couple of sessions, while Hong KongÆs Hang Seng Index has tumbled 8.1%.

China New Town offered 400 million shares, or 28.6% of the company, of which 97% went to institutional investors. The remaining 3%, or 12 million shares, will be sold to Singapore retail investors through a separate offering that opened yesterday and will run for a week. About 80% of the shares on offer were new, while the remainder were sold by Forum Asian Realty Income who is one of a group of pre-IPO investors who bought into the company through a convertible bond issue. These investors also include units of hedge fund Och-Ziff and Merrill Lynch.

There is a 15% greenshoe that could boost the total proceeds to $260 million if exercised in full.

Approximately 70% of the institutional portion went to Asian accounts, while the rest ended up in European or US hands. In terms of types of investors, the source says 50% was taken up by long-only funds, 35% by hedge funds and 15% by private banking clients and other high net-worth individuals.

Citi was the sole bookrunner. DBS is coordinating the Singapore public offer and is also joint lead manager together with Deutsche Bank. Deutsche Bank is also a shareholder in the company with a 9% stake after the IPO.

The proceeds will go towards the continued development of two of the companyÆs three new town projects in Wuxi and Shenyang, which are expected to be completed in 2011 and 2012, respectively. The companyÆs third project in Shanghai will be completed by the end of this year.

In a release issued yesterday in connection with the launch of the retail offering, Chief Executive Officer Stan Yue said the company anticipate that the increasing rate of urbanisation in China will lead to increasing demand for the services of new town developers.

ôWe intend to capitalise on the exciting growth prospects by expanding into inland provinces that we believe have a higher economic growth potential and increasing demand, driven by a move towards higher standards of living,ö he says.

As a developer of land, China New Town benefits from land appreciation as this means it can pocket more money when it sells the residential development rights to a third party û a fact which may explain the strong investor interest.

ôIt actually works as a hedge for the property developers,ö one observer notes. ôWhen land prices increase the property developersÆ margins get thinner and thinner, but thatÆs when China New Town benefits.ö

The reason why the company chose to list in Singapore, which is still only attracting a marginal number of Chinese listing candidates compared with the large number going to Hong Kong, has mainly to do with the fact that it wants to distinguish itself from its Hong Kong-listed parent company. By going to Singapore, it may also find it easier to be judged in its own right as a land developer, rather than being boxed in with the ever growing number of property developers in Hong Kong, the source says.

And deeming from the performance of Chinese residential developer Yanlord Land Group, which also chose Singapore when it went public last year, being listed in outside of Hong Kong doesnÆt appear to be on any disadvantage in terms of capturing the positive momentum towards the sector. Since its debut in June 2006, Yanlord has gained 240% to yesterdayÆs close of S$3.68.
¬ Haymarket Media Limited. All rights reserved.
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