Guangzhou R&F Properties secures IPO

Chinese property play manages to raise $254 million in face of difficult markets.

Guangzhou R&F Properties priced a $254 million IPO on Friday (July 8) via lead managers Credit Suisse First Boston and Morgan Stanley in the face of considerable retail indifference.

The 183.9 million share deal faced a very weak primary market in which the previous three Hong Kong IPOs have all traded down by 10%-20% and sentiment towards the China property market has slumped. In these circumstances it would not have surprising if the deal had been priced out of its range or even been pulled. Indeed, two other equity deals in the market, for STX Pan Ocean Shipping and Kingboard Chemical, had to cut their price ranges on Friday in order to get the deals done.

Nevertheless, Guangzhou R&F Properties ploughed on knowing that if it pulled the deal, it would have to go through a new three-month auditing and valuation exercise. The sale of 25% of the company in new shares has been on the cards for over a year.

Observers say the institutional book closed two times covered after attracting a core group of committed private equity, real estate and contrarian investors. In the end, institutions took 96.2% of the deal, with retail taking only 3.8%.

Retail should have been allocated 10%, but this tranche had to be cut back after it closed undersubscribed. On the institutional side, Warburg Pincus is said to have taken at least a quarter of the deal, with ten other institutions taking stakes of at least $15 million each. Together they took practically the entire institutional portion.

The final distribution saw the US allocated 50% of the deal, Asia 40% and Europe 10%. The European allocations were affected by the London bombings and many accounts are said to have pulled their orders just before pricing.

Pricing came in at HK$10.80 a share, just above the bottom of an indicative range of HK$10.7-HK$12.03 a share. At this price, the company has been valued at 8.1 times 2005 earnings and five times 2006 forecast earnings.

The two most comparable Chinese property plays, China Vanke and China Overseas Land, are currently trading at 10.5 times 2006 earnings and nine times 2006 earnings respectively. Guangzhou R&F has come in at a steep discount, but is in line with Hopson, the largest Guangzhou based property company, which is trading around five times 2006 earnings.

Guangzhou is privately owned by Chairman Li and is around 12 years old. It is now the second biggest residential property developer in the southern city. It is also the number three developer in Beijing and is starting operations in Tianjin.

It is moving into office development and expects to increase this portion of its business from around 20% to 30% in coming years. It is also building two hotels in Guangzhou for Conrad and Marriot to operate. It will own the properties.

Morgan Stanley is understood to be a co-investor with the company in a property deal in Beijing.