Hong Kong-listed Fantasia joins spin-off trend

The Chinese developer plans to list its majority-owned property management unit that two months ago was valued at $175 million.

Chinese real estate developer Fantasia Holdings Group has joined a series of Hong Kong-listed companies in trying to boost the value of its business by spinning off certain assets for a separate listing.

In an announcement issued late on Monday, Fantasia said it has submitted a listing application to the Hong Kong stock exchange for its property management subsidiary, Colour Life Services Group. Subject to approval, Colour Life will sell new shares through an initial public offering with the aim of listing in its own right in Hong Kong.

The company has flagged these plans previously, first in September last year when it said it had begun a reorganisation of its property operation business and intended to evaluate its business model in order to optimise its business portfolio. And then again in June this year when it said the goal was to complete a spin-off by the end of this year if market conditions permit and it obtains the necessary regulatory approvals.

The plan is similar to that of Hong Kong property developer and infrastructure company Hopewell Holdings, which tried to spin off its Hong Kong property business via an IPO in early June. Hopewell was, however, forced to call the deal off after a sell-off in global equity markets led to a lack of demand.

Meanwhile, property developer and investment company Great Eagle Holdings listed three Hong Kong hotels through a business trust-type vehicle at the end of May, while New World Development attempted a similar listing of some of its hotels in June. New World was ready to launch the IPO for its NW Hotel Investment trust in the same week that Hopewell HK Properties was due to price, but chose not to go ahead at that time due to the challenging markets.

Similar to Fantasia, a common aim for these three Hong Kong developers was to release hidden value in their already listed entities, to raise cash that could be used to grow other parts of the business and to create a separate financing platform for the spun-off assets that would free up resources in the rest of the group.

A key difference between Fantasia and the others, however, is size.

Langham Hospitality Trust, which was sponsored by Great Eagle, raised $549 million from its IPO, while Hopewell HK Properties was seeking to raise at least $670 million and NW Hotel Investment was targeting between $700 million and $800 million. Compare that to Fantasia, which itself has a market cap of just $845 million. A spin-off of one of its subsidiaries will obviously be a lot smaller than that.

Fantasia did not specify how much of Colour Life will be put up for sale, but it currently owns 67.19% of the property manager and said the intention is that Colour Life will remain a subsidiary after the IPO. That suggests that Fantasia will continue to hold at least 50%, since a smaller unit will typically be referred to as an associate.

The company did not break out the results for the Colour Life subsidiary in its 2012 earnings, but the segment referred to as “property operations”, which appears to include most of the Colour Life business accounted for just 7.6% of the total revenue, even after taking into account revenues it derived from other parts of the Fantasia group. It accounted for 4.2% of the operating profit.

In June this year, Colour Life raised approximately HK$54.3 million from the sale of new shares to “certain strategic investors” that were not identified but said to be unconnected to the rest of the group. The new shares represented about 4.01% of the enlarged issued share capital and valued the subsidiary at HK$1.36 billion ($175 million).

“I’m all for unlocking value, but the key question is whether these vehicles are going to be big enough to attract institutional investors when the parent itself is already a small- or mid-cap company,” one industry source said.

He went on to note that, aside from the desire to unlock value, the spin-off plans probably also demonstrate the need for the Chinese property developers to raise capital to grow their businesses.

After a busy five months at the beginning of the year, the international debt market is currently largely shut for high-yield companies, and many of the Chinese developers are also trading at low valuations – Fantasia is currently quoted at a 2013 price-to-earnings (P/E) ratio of 4.4 times – which would make them reluctant to issue new shares at the parent company level.

“If they can spin-off a unit at a P/E above 5 times, then perhaps it makes sense, but the problem is that the property sector is already littered with small companies,” the source said.

Fantasia did access the international bond market in September last year, however, when it raised $250 million through a five-year deal that paid a 13.9% yield at the time of issue. And in May this year it issued Rmb1 billion ($163 million) of three-year dim sum bonds at a yield of 7.875%.

In the 2012 annual report, Fantasia said the dollar bond “was crucial for the group to replenish cash and secure promising investment projects in an unfavourable market.”

According to the same report, Fantasia’s property operation business experienced rapid growth last year and Colour Life acquired a number of property management companies. As of December 31, the unit managed a total of 437 projects – a 38% increase from 12 months earlier. The area under management increased by 65% to 50.31 million square metres during 2012 and its business coverage was extended to 24 core cities.

“Colour Life Services Group has become a large-scale property service group… and it has turned itself from a pure management company into a community service operator which offers a wide coverage of online and offline services,” Fantasia said in the annual report.

Fantasia itself started property developer in Shenzhen in 1996, but since then it has grown significantly and is now active in four of the fastest growing economic regions in China: the Chengdu-Chongqing economic zone, the Pearl River Delta region, the Yangtze River Delta region, and the Beiing-Tianjin metropolitan region.

Since its listing in Hong Kong in November 2009 it has also expanded into new areas in addition to the development and property management businesses. It now has six other business areas, namely financial service, community service, business management, hotel management, cultural tourism and senior housing.

The share price hasn’t really reflected that expansion, although the stock did almost double in value from about HK$0.75 in October last year to a high of HK$1.43 in January, amid an improving growth outlook for China. However, Tuesday’s close of HK$1.26 is still well below the IPO price of HK$2.18 from four years ago.

The 28.8% of Colour Life that isn’t currently owned by Fantasia and the strategic investors that bought into the company in June is owned by the senior management and other employees of this business segment, according to an earlier statement by the company.

Fantasia provided few other details of the listing plan in Monday’s announcement, but did say that part of the IPO will be offered to its existing shareholders via an assured entitlement.

The spin-off doesn’t require shareholders’ approval. 

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