Chinese property company to list in US

Xinyuan Real Estate, an asset-light developer with a focus on China's tier-2 cities, is seeking to raise up to $263 million.
Xinyuan Real Estate is set to become the first Chinese property developer to list in the US after kicking off the marketing for its $227.5 million to $262.5 million initial public offering yesterday.

The deal, which is led by Merrill Lynch, will offer investors a rare opportunity to gain exposure to the property market in ChinaÆs rapidly-growing tier-2 cities. Set up in 1997 with the aim of building comfortable and convenient, yet affordable, housing for mid-income earners in Zhengzhou City in Henan Province, the company has over the past year expanded into four other tier-2 cities.

These cities are a major magnet for the migration of the Chinese population from rural to urban areas, which is expected to continue at unabated speed over the next few years. According to ChinaÆs National Statistics Bureau, 100 million people are expected to make this journey between 2006 and 2010, which will create a demand for about 370 million square meters of housing in each of those years.

In an interview with FinanceAsia in mid-2006, the companyÆs chairman, Zhang Yong, estimated that this will translate into a need for 1.5 million additional apartment units per year in tier-2 cities.

The company uses a scalable business model that emphasises rapid asset turnover û on average it takes less than 18 months to construct a building of up to 11 stories and up to 24 months to complete a high-rise apartment building - efficient capital management and strict cost control, which ought to go down well with investors. One of the key benefits of focusing on tier-2 cities is also that the availability of land is much greater than in the major cities, and can typically be acquired at a lower cost.

This is leading to wide profit margins and healthy growth in the bottom line as the company completes more projects. In the first nine months this year, net profit is already more than twice the $16.1 million profit achieved for the full year 2006, and one source says, the expectation is that it will end 2007 with a bottom line of $47 million. It is expected to double that again in 2008.

In last yearÆs interview, Chairman Zhang, said the companyÆs own projection is for a 100% increase in revenues every year in the five years from 2005 when it turned over $61.5 million. So far, that projection has proved correct.

Xinyuan is also likely to attract the attention of US investors during the roadshow because of its relationship with Samuel Zell û a well-known US born billionaire and entrepreneur with a strong focus on property investments who is credited with having listed the first US real estate investment trust (Reit) and for his ability to resurrect distressed assets. Outside the property sector, he also owns the Chicago Tribune and the Los Angeles Times as well as the Chicago Cubs baseball team, although he is reportedly planning to sell that team.

Zell bought into a 17.5% stake in Xinyuan last year through Equity International (EI), an investment company specialising in real estate investments outside the US that he runs together with co-founder Gary Garrabrant. The fact that EI has two other property assets û Homex in Mexico and Gafisa in Brazil û that are both listed in the US is seen to have been a major factor in XinyuanÆs decision to go public on the New York Stock Exchange. However, sources say the company was also keen to distinguish itself from the Mainland developers listed in Hong Kong and make sure its focus on tier-2 cities doesnÆt drown among all the other developers focused on major cities and regions.

Aside from EI, China-focused private equity fund Blue Ridge China also participated in the $25 million re-capitalisation in August 2006. The latter currently holds 26.2% of Xinyuan. The rest of the shares are held primarily by the chairman and his wife (56.8%), while a smaller portion is owned by other directors and executives as a group.

Xinyuan is offering 17.5 million American depositary shares (ADS), or 30% of the company, at a price between $13 and $15 apiece. Each ADS is backed by two new common shares. The deal also has a 15% greenshoe that could boost the total proceeds to $301.8 million.

The price range values the company at 9.3 to 10.7 times its estimated 2008 earnings, which is low compared with some of the other smaller-scale Chinese developers. However, one source notes that issuers cannot be too greedy in the current market environment, not least because many of the other Chinese companies listed in the US have seen sharp sell-offs over the past couple of weeks.

Among the valuation comparables, Singapore-listed Yanlord trades at 18 times 2008 earnings, while in Hong Kong, recently listed Zhong An Property trades at 13.8 times, KWG Properties at 13.6 times and Aoyuan at 9.5 times.

At present, the company has seven properties under construction and another seven at the planning stage. So far it has completed 13 projects, all of which are located in Zhengzhou.

The deal is expected to price on December 11 with the New York trading debut set for the following day.
¬ Haymarket Media Limited. All rights reserved.
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