Franshion's IPO shows investors still love China property

Franshion Properties raises $424 million from its Hong Kong listing, proving that the Chinese real estate sector is resistant to broader poor market sentiment.
Chinese real estate developer Franshion Properties has raised HK$3.3 billion ($424 million) via its Hong Kong initial public offering, after setting its price at the top of the range at HK$2.35 a share.

Franshion's IPO follows on the heels of a number of China property-related offerings in Hong Kong, including Country Garden and KWG Properties. There are more than 20 China-centric developers currently trading on the Hong Kong bourse, but investor interest for Franshion was still high. A source says Franshion drew over 200 orders into the institutional book, which ended up 40 times oversubscribed post-clawback. The clawback was triggered by an over-subscription level of 171 times in the retail tranche which increased the portion from 10% to 50% of the deal.

The indicative price range was HK$1.85-HK$2.35 and given the overwhelming response the developer could comfortably price at the ceiling of HK$2.35. "This values the company at a 5% discount to its post-money net asset value," a source close to the deal explains.

Retail investors lapped up the Franshion story despite nervousness prevailing in Asian markets generally and Hong Kong's market specifically. KWG Properties priced in June, when sentiment was more stable, and attracted 225 times subscription for its retail tranche, ie. around HK$102 billion ($13 billion) of orders. KWG's institutional tranche was 185 times covered, equivalent to approximately HK$208 billion worth of orders, after adjusting for the clawback, and subtracting the 25.3% portion that went to the cornerstones. Franshion's performance in a more difficult market environment was broadly similar.

ôSome of Franshion's comparables trade at a 35%-50% premium to their NAV, and others trade at multiples (of NAV), depending on which research reports you pick up and how analysts calculate the numbers,ö a source close to the deal adds.

Franshion offered 1.41 billion new shares, or 30% of the enlarged share capital. A 15% greenshoe could increase the deal size to $487 million. Deutsche Bank was the sole bookrunner.

Orders were skewed towards Asia, which accounted for 65% of the total demand while the US and Europe accounted for 20% and 15%, respectively. The highest demand was from institutional investors though some dedicated-property funds, Hong Kong corporates and tycoons also placed orders. Only a 22% tranche was available for institutional investors, after retail investors took half the deal and 28% was reserved for cornerstone investors.

ôIt is the only available pure-play exposure to China commercial assets," comments a specialist. "Comparables, such as China Resources Land and Hang Lung, offer a blended exposure but not a pure play.ö

The roster of cornerstone investors is impressive. Chow Tai Fook owned by Cheng Yu Tung, the chairman of Hong Kong-listed New World Development, will purchase around 4.6% of the deal. Hong Kong-listed New World China, in which ChengÆs family owns a majority stake, will buy another 4.6% of the total shares issued. In addition, the Government of Singapore Investment Corporation, Stark Master Fund and Stark Asia Master Fund will purchase 9.2%, 7.4% and 1.8% respectively.

Before the IPO, Franshion agreed to acquire 75% of both Sinochem Property Management and Wangfujing Hotel Management from Sinochem for HK$826 million. The company will also buy a 50% share of Chemsunny for HK$1.4 billion. When the acquisitions are complete, the company will fully own Sinochem Tower, Wangfujing Grand Hotel and Chemsunny Plaza, which are all located in Beijing.

In addition, Franshion can exercise an option offered by Sinochem to acquire its indirect interests in Jin Mao, Shimao Investment and Shanghai Yin Hui, which hold shares in various properties and property development projects in China.

Sinochem's pool of properties worked to Franshion's advantage as a banker explains: ôThe large number of quality assets which the parent owns and which could be injected into Franshion later make for a compelling investment story as Franshion's pipeline is healthy and defined.ö

The company was a 100% subsidiary of Sinochem Corporation, a state-owned enterprise in China, which is under the direct control of the State-owned Assets Supervision and Administration Commission of the State Council. It focuses on the development, sale, leasing and management of commercial and residential properties, which are located in Shanghai, Beijing and Zhuhai.

Estimates suggest the developer will reach a net profit of HK$419 million by the end of 2007. In 2006, Franshion grew net profit by 6.7% to HK$169.5 million.

China Resources Land can be treated as a surrogate as both companies have strong parentage, analysts comment, although the underlying property portfolio of Franshion and China Resources Land may not be strictly comparable.

China Resources Land shares have surged by 50% since June and hit a high of HK$14.98 on July 24 before losing 7.8% in the following four trading days, in the same period that the Hang Seng Index shed more than 700 points.

Sinochem will still own 70% of the company after the offering. Franshion will use the IPO proceeds to fund acquisitions and to develop further real estate projects.

Franshion's trading debut is scheduled on August 17.
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