While initial comments had suggested that the stock was expensive at the upper end of the HK$4.18 to HK$5.38 range, the final pricing showed that investors disregarded their own talk of a somewhat pricey deal and piled into the offering. In the end, there was very little price sensitivity in the book.
ôYes, people say the valuation wasnÆt cheap, but then they turn around and ask why they couldnÆt be a cornerstone investor,ö notes one banker familiar with the marketing process.
According to sources, the institutional tranche was about 30 times covered after adjusting for the 20% retail tranche and the 26.4% that was taken by cornerstone investors. More than 500 accounts participated, committing an aggregate $25 billion towards the offering.
Even more stunning, however, is the fact that Hong Kong retail investors submitted orders worth more than HK$333 billion, or $42 billion, to get shares in the Guangdong-based developer which specialises in building landscaped village-style residential hubs targeted at middle-class home buyers.
The subscription amount tops the $32 billion of retail money received by China Merchants Bank and the $37 billion submitted for Bank of ChinaÆs IPO to become the second most popular retail offering in Hong Kong on record after Industrial and Commercial Bank of China. The latter received $55 billion worth of retail orders.
Country Garden had earmarked an initial 10% of the deal for retail investors and, based on the dollar amount received, this tranche ended up being about 256 times covered, the sources say. More than 680,000 applications were received, although these also included orders from high-net-worth individuals and some Hong Kong tycoons who were not allocated shares as part of the cornerstone process.
The oversubscription obviously triggered a full clawback, but thanks to an earlier waiver obtained from the Hong Kong stock exchange, this increased the retail tranche to only 20% - compared with the usual 50%. Even after excluding this and the around 26.4% of the deal that was bought by the five cornerstone investors, the bookrunners were still left with about $911 million to allocate between the institutional investors û larger than the entire deal size of any other completed Hong Kong IPO this year.
There was no shortage of takers, though, and while the early momentum in the book was driven by Hong Kong corporates and private individuals who were already familiar with the developerÆs business just across the Chinese border, sources say international investors caught on as they learnt about the companyÆs strong growth projects.
The also overcame some initial scepticism about the fact that the company is majority owned by the 25-year-old daughter of the companyÆs founder and preset chairman after meeting with the rest of the management. The hit rate from the one-on-one meetings was said to have been more than 90%.
The final price values Country Garden at a 2007 price-to-earnings multiple of 21.3 to 21.9 times or a 2008 multiple of 15 to 17.2 times, depending on whether one uses the earnings projections made by UBS or Morgan Stanley. The two banks were joint bookrunners on the deal.
This compares with a 2007 P/E multiple of 16.8 times for Agile Property, which is also based in the Guangdong province, 20.9 times for Shimao Property and 12.2 times for Greentown China. Looking ahead to 2008, AgileÆs multiple falls to 12.9 times, while Shimao is valued at 14.4 times and Greentown at 10.1 times.
These listed developers have had a huge run over the past six weeks, however, gaining between 41% and 45% each, and this has obviously boosted the relative attractiveness of the newcomer.
Many analysts have recently started to prefer to value Mainland developers on a P/E basis and UBS argued that Country GardenÆs quick turnaround of land and high earnings growth made a P/E valuation the most appropriate for it too. However, Morgan Stanley preferred to value Country Garden on a net asset value basis (as it does with the rest of the Mainland property sector) and relative to its end-2007 NAV estimate, the IPO price values the company at a 12% premium.
This too looks pricey compared with Agile, Shimao, Shanghai-listed Vanke and China Greentown, which all trade at a discount to their respective forward NAVs.
Investors were, however, prepared to overlook these comparative valuations to get a part of what will be the largest Mainland developer listed in Hong Kong in terms of market cap. The company has generated high growth rates over the past few years (184% last year) which, according to syndicate research has a lot to do with its quick turnaround of land, which enables the company to free up cash that it can plough into new projects.
Country GardenÆs homes are also popular with the public because it tends to sell them at affordable prices and doesnÆt deliberately withhold units in anticipation of price increases down the road û a strategy which also helps the quick asset turnaround.
The company has 27 property projects at various stages of development and the fourth largest land bank among the Chinese developers behind Shanghai-listed Vanke, Agile Property and Shimao Property. Of the total 18.8 million square metres, a massive 13.3 million sqm (or 71%) is available for future developments, which puts the company in a good position to benefit if property prices continue to rise. Syndicate analysts suggest the existing land bank will sustain the company for about five years, but project it will acquire another five million sqm of land in 2007, which will its development horizon to eight years assuming an annual completion rate of three million sqm.
ôIt didnÆt really matter which valuation metrics investors chose to focus on,ö one observer notes. ôFrom an NAV basis they became comfortable with the assumption that the company will continue to grow its assets significantly and from a P/E basis the profit growth is expected to be supported by the high turnover of its properties.ö
The offer comprised 2.4 billion new shares, or 15% of the company, plus a greenshoe of an additional 360 million shares, that could increase the maximum proceeds to HK$14.8 billion ($1.9 billion). If the shoe is fully exercised it could also become the largest private sector IPO out of China ahead of Semiconductor Manufacturing International Corp. (SMIC)Æs $1.8 billion offering in March 2004.
Country Garden also marks the largest Hong Kong IPO year to date, although that record will be short-lived as China Citic Bank is set to complete its up to $5.4 billion dual listing next week. The H share tranche of that deal will raise between $3.2 billion and $3.7 billion.
Given the scale and the positive buzz still surrounding the Mainland property sector it was perhaps no surprise that the interest to be a cornerstone investor was so great û even if they have to accept whatever price comes out of the bookbuilding process.
The five investors signed up by Country Garden comprise Henderson Land Development Chairman Lee Shau Kee (through a private investment vehicle) and Cheng Yu-tung through his privately controlled Chow Tai Fook, who each bought HK$1 billion worth of shares. Taking $500 million each were Citic Pacific, Temasek and the Malaysia-based Kuok Group, which among other things is the controlling shareholder of the Kerry Group in Hong Kong as well as the Shangri-La hotel group.