Hui Xian Real Estate Investment Trust yesterday fixed the price of its initial public offering at the bottom of the offering range for a total deal size of Rmb10.48 billion ($1.6 billion) and a 2011 dividend yield of 4.3%, and on Friday next week will become the first entity to list renminbi-denominated equity units on the Hong Kong stock exchange.
This is a significant step in terms of the continued development of the offshore renminbi market in Hong Kong, but the expected rush into the new product didn’t happen and, judging from the headlines in the local press, the IPO is not the triumphant event that it was painted out to be in the weeks before the launch. In fact, much of the coverage suggests it is something of the disappointment.
However, that ignores the fact that it has been less than two years since Beijing started to allow cross-border renminbi trade flows through a limited pilot programme that involved only five Chinese cities, Hong Kong, Macau and Southeast Asia, and less than one year since foreign companies became allowed to issue renminbi-denominated offshore bonds in June last year. The development of the cross-border flows in these two years has been very rapid and that may have meant that expectations were getting ahead of themselves.
Hui Xian Reit, which is sponsored by Li Ka-shing-controlled Cheung Kong (Holdings), was structured to be very retail-friendly with 20% of the deal earmarked for the Hong Kong public offering to begin with and a promise that this portion of the deal would be increased to at least 40% if it was more than five times covered. The belief was that the Hong Kong public would jump at the opportunity to get a better return on their growing renminbi holdings and would become the driving force for this IPO.
In reality, investors approached the new instrument with quite a lot of caution, perhaps waiting to see how it trades before they decide to buy into it or not. Reits don’t tend to rally significantly from their IPO price as they are often priced quite close to their net asset value and hence investors may well be able to buy Hui Xian in the market at a similar price later on.
According to sources, the retail portion of the deal was about 2.5 times covered, which means that retail investors committed a combined Rmb5.5 billion to the IPO and will hold just over Rmb2 billion of the Reit at the time of listing. The banks received about 36,000 retail orders, which is well below the hundreds of thousands of orders that are typically received for hot Chinese IPOs in Hong Kong dollars.
Meanwhile, institutional investors were said to have been disappointed by this “lukewarm” response from retail investors, which made them a bit cautious too. The fact that global equity markets tumbled on Monday and Tuesday this week after Standard & Poor’s changed its ratings outlook on the US to negative might have played a role for the overall sentiment and the news that consumer inflation in China hit a more than two-and-a-half-year high of 5.4% in March also didn’t help.
In the end, the institutional tranche was nearly two times covered and attracted more than 100 investors, sources said. One banker estimated that about 40% of the demand came from long-only investors, including real estate specialists, while hedge funds accounted for some 25%. The rest came from private wealth managers, which tend to be big buyers of yield-plays like Reits.
However, some institutional investors were said to have been disappointed with the fact that the yield wasn’t higher — especially for a new product with no trading record — and felt Hui Xian was too expensive. There has also been a lot of talk about the potential lack of daily liquidity in the secondary market — the stock exchange is even planning to introduce a renminbi trading support facility (TSF) later this year to help ensure an efficient market — although bankers working on the deal said that topic didn’t really come up during the bookbuilding.
At the time of listing, Hui Xian will hold one property, the Oriental Plaza in Beijing, which is a mixed-use development that includes a shopping mall that accounted for 40% of operating profit during the first 10 months of last year, eight grade-A office buildings, serviced apartments and the Grand Hyatt hotel. It is located close to the Forbidden City and Tiananmen Square and is valued at Rmb31.4 billion. Cheung Kong and its subsidiary Hutchison Whampoa still owns approximately 30.8% of the Reit. The other pre-IPO owners of Oriental Plaza, including Bank of China and China Life Insurance, jointly own 29.2%.
Whether the Hui Xian Reit met expectations or not, it is worth remembering that this was still a pretty big transaction. It is the largest IPO in Hong Kong so far this year and the second-largest Reit to list in Hong Kong after Link Reit. It is also multiple times bigger than the first renminbi-denominated corporate bonds that were issued in Hong Kong last year — the Rmb1.4 billion offering by Hong Kong-listed Hopewell Highway, which broke the ground, and the Rmb200 million deal by McDonald’s, which was the first offshore renminbi bond to be issued by a multinational company.
Hui Xian sold 2 billion units, or 40% of its entire equity capital, at price of Rmb5.24 — the bottom of the Rmb5.24 to Rmb5.58 marketing range. The deal also has a 15% greenshoe, which could lift the total deal size to about $1.84 billion if fully exercised. The IPO was arranged by BOC International, Citic Securities and HSBC.
The price range translated into a 9% discount to net asset value, based on end-2011 estimates, and a 2011 dividend yield of 4.3% (based on the joint bookrunner consensus). This compares very favourably with the renminbi deposit rates in Hong Kong, which range from 0.45% to 0.6%. It is also above the yield of most of the offshore renminbi bonds: out of 59 bonds issued so far only four pay a coupon of more than 4%. However, investors who are willing to travel to the mainland to open a renminbi bank account there, can get 4% interest on two-year time deposits.
The indicated yield also isn’t as high as that of other Hong Kong-listed Reits, which trade at an average 2011 yield of about 5.7%. However, these obviously don’t offer exposure to renminbi appreciation. Guangzhou Reit, which is the only Hong Kong-listed Reit to have all its assets in China, but is significantly smaller than Hui Xian in terms of both asset value and revenues, and is currently trading at an estimated 2011 yield of about 7.1%.
The next test will come when Hui Xian starts trading on April 29. All eyes will be on the local bourse that day to see whether the trading and payment systems can handle this new instrument and whether there will be enough liquidity in the counter to create a viable secondary market.
If there are no glitches and the listing debut is deemed successful, there are supposedly other companies waiting in the wings to issue renminbi-denominated Reits. And perhaps the next one will come with more realistic expectations.