Property services provider Greentown Service Group pressed ahead with plans to raise HK$1.7 billion ($221 million) through an initial public offering in Hong Kong on Tuesday, confident that it could sail through the extreme volatility caused by Britain's decision to leave the European Union.
One Hong Kong-based equity capital markets banker told FinanceAsia that markets have been much less volatile than expected so far this week, providing much needed comfort for issuers looking to launch deals before quarter-end.
Pricing of the Greentown Service IPO is slated for July 4 and trading is set for July 12.
Britain’s unexpected decision to withdraw from the EU spurred turmoil on global markets on Friday, sending stocks sharply lower as investors worried about the potential spillover effects for the rest of the EU and for European economic growth.
But losses on the Hang Seng index have since stabilised above the 20,000 level while shares in Hong Kong-listed Greentown China, which is linked to Greentown Service, are little changed since Friday. Mainland China stocks, meanwhile, have rebounded to a three-week closing high, led by companies with minimal overseas exposure.
Greentown Service generates all its revenue from China, according to its preliminary prospectus.
Greentown Service provides property management and consultancy services to Chinese real estate companies, with a particular focus on high-end residential properties. Services provided by the company include cleaning, gardening, repair, maintenance, and security services.
As of the end of last year, the company managed properties covering 82.8 million square metres of space across 82 Chinese cities, according to a company presentation. That is roughly one fourth the business of Colour Life Services Group, the property management arm of Fantasia Holdings Group.
China’s property management sector is highly fragmented with over 70,000 companies as of the end of 2014, according to China Index Academy. As such, Greentown Service aims to grow its business by acquiring other firms as the industry consolidates, according to the company’s preliminary prospectus.
According to a deal term sheet, the company plans to spend 52% of the IPO proceeds for acquisitions, with the remainder used on marketing, debt repayment, and working capital.
Property management generally commands lower profit margins compared with direct property sales but is less exposed to fluctuations in property and land prices. Government measures to contain home price growth have also led to lower margins for property developers, thereby making management companies more attractive.
For instance, Greentown Service’s 18% gross profit margin last year was in line with Greentown China, which saw a margin squeeze of 5.5 percentage points compared with 2014 due to lower selling prices.
Terms
The IPO terms include 778 million new shares marketed at an indicative price range of HK$1.74 to HK$2.2 per share, giving the company a market capitalisation of $623 million to $787 million.
That equates to 13.9 to 17.5 times the company’s estimated earnings by the end of this year based on syndicate consensus estimates, according to a source familiar with the situation.
Such valuations represent a premium to Colour Life, a bigger player that trades at 13.3 times earnings on a forward basis, and smaller competitor Zhong Ao Home Group, which is valued at 9.6 times earnings.
Colour Life and Zhong Ao are the only two property management companies currently listed in Hong Kong.
The premium could, however, be justified by Greentown’s stronger earnings growth of 35.6% last year compared with Colour Life at 15.6%. Zhong Ao booked a net profit decline of 81%.
It is worth noting that while the company is established under the Greentown brand, it currently has no direct shareholding relationship with the privately-owned property developer. Greentown Service is majority-owned by Song Weiping, who is also a co-chairman of Greentown China.
Greentown China will be investing in the property management affiliate through the IPO as a cornerstone investor, according to the deal terms. It will subscribe to $39.4 million-worth of shares and is one of the three cornerstone investors alongside China Orient Asset Management and Zhejiang Silicon Paradise Asset Management, which will be investing $25 million and $30.4 million, respectively.
Bank of America Merrill Lynch and BOC International are joint sponsors of the IPO.
