China Properties returns to the market at a deep discount to NAV

The $208 million IPO, which consists partly of previously privatised assets, was priced towards the low end of the range.
China Properties Group on Thursday completed an initial public offering that will allow the same assets that were privatised by the chairman in 2003 to return to the Hong Kong market.

Remembering that the previous buyout was done at a sizeable discount to net asset value, many investors were sceptical about the long-term intentions of the controlling shareholder, however. This limited the total demand and forced the deal to be priced close to the bottom of the indicated range, or at a discount of more than 40% to the estimated post-money NAV.

The deal comprised 450 million new shares, which were offered at HK$3.50 to HK$4.70 apiece and were priced at HK$3.60 for a total deal size of HK$1.62 billion ($208 million). If the 15% greenshoe is exercised in full, total proceeds will increase to $239 million. Whether or not that will be possible will depend on how the shares fare when they start trading on February 23.

Compared with the other four Hong Kong IPOs of size this year, China Properties wonÆt have nearly as large a pool of natural buyers to rely on after the debut, since its more modest subscription rates mean orders didnÆt have to be scaled back that much.

According to a source familiar with the deal, the 90% institutional tranche attracted approximately $1 billion of demand, or about 5.3 times the $187 million worth of shares on offer, while the retail portion of the deal was about 10 times covered. This means China PropertiesÆ offer is the first Hong Kong IPO this year that didnÆt trigger a clawback. For that to have happened, the retail tranche would have had to be at least 15 times covered.

One observer noted that subscription rates of five or 10 times would be considered highly successful in most other markets and can hardly be described as a failure. Even so, the coverage levels contrast sharply with the other local IPOs this year.

Notably, the $308 million IPO for China Huiyuan Juice, which ran parallel to the China Properties offer, saw its institutional tranche 197 times covered on a post-clawback basis, while the retail tranche was more than 900 times subscribed.

ôDemand was definitely affected by the earlier privatisation,ö says one observer. ôInvestors were concerned about how much weight minority shareholders will have in the eyes of the controlling shareholder.ö

However, another source said the management had done a good job during the roadshow of convincing investors that the companyÆs corporate governance standards are up to scratch. In the end, though, what really made investors submit their orders was the fact that they liked the locations of the companyÆs existing property developments and the options it holds for acquiring three more projects from Chairman Wong Sai Chung, he said.

Wong will still hold 75% of the company at the time of listing, or 71.25% if the greenshoe is fully exercised.

According to the source, some 75 global institutions were among the investors who participated in the deal. About 25% of the demand came from the US, while the rest was split half and half between Asia on the one hand and Europe and the Middle East on the other.

The final price values China Properties at a 41% discount to its post-money NAV, which is well above the bottom end of the 25% to 50% range where most of the Hong Kong-listed Mainland developers tend to trade. Among the developers with most of their operations in Shanghai, however, there are several examples of stocks trading at even deeper discounts than the newcomer. Among those are Shanghai Forte at 49%, Shimao at 51% and Shanghai Real Estate at 55%.

China PropertiesÆ main project consists of a prime stretch of land along ShanghaiÆs Nanjing West Road û one of the busiest and most well-known shopping streets in the city û where it is planning to develop a high-quality integrated residential and commercial project with a gross floor area of 409,000 square metres under the name of Concord City.

It is also developing a large-scale residential and retail community in ShanghaiÆs Minsheng district called Shanghai Cannes and holds options to acquire three other projects from Wong, including a retail street project in Kunshan International City near Shanghai, a retail and residential project in Beijing and a residential project also in the capital named Beijing Cannes.

Merrill Lynch was the sole bookrunner for the deal, while Cazenove Asia was joint sponsor and joint lead manager. The US investment bank bought a 4.87% stake in China Properties for $50 million in April last year, but in January entered into a repurchase agreement which will see the company buy back all those shares for $55 million in connection with the IPO. Merrill will hold no shares in the company by the time it starts trading.

The privatisation back in 2003 was done through a voluntary conditional share offer that was prompted by the fact that Chairman Wong felt the stock (then trading under the name of Pacific Concord) was both undervalued and highly illiquid. The shares were bought back at a 51% premium over the market price, but at a 64.5% discount to the adjusted net tangible asset value.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media