Investors lap up E-House IPO

Despite turbulent markets, the China-centric real estate broker raises $201 million after pricing its shares 2% above the top of the range.
ChinaÆs real estate broker E-House garnered solid demand for its US initial public offering, despite the ups and downs the market experienced during the course of the bookbuild, enabling it to price at $13.80.

E-House launched its roadshow on July 24, when the Dow Jones Industrial Average was going strong at about 13,700 points. Nervousness triggered a selldown from July 26 onwards and the index went as low as 13,182 on August 3. It bounced back this week, closing at 13,657 on August 8.

But the market volatility was no deterrent to investor demand for the E-House deal. The book received more then 300 orders and ended up 15 times covered, according to a source. The majority of the investors came from the US, and there was little price sensitivity in the book. As a result, the issuer successfully priced its offering 2% above the top of the range at $13.80.

ôIf the market hadnÆt recovered this week, it would have been difficult to price above the top of the range. On the other hand, if markets had not been volatile the issue could have been priced even higher,ö comments a specialist, succinctly summing up the prevailing situation.

The price values the company at 28.8 times its 2007 earnings pre-greenshoe. This pitches E-House at a premium to Hong Kong-listed Hopefluent Group, which trades at a price-to-earnings multiple of 17.7 times for 2007. The two are not strictly comparable as Hopefluent is smaller in terms of area of coverage and annual income, due to its more restricted geographical focus primarily on the Guangdong market. Hopefluent recorded a net profit of HK$73.5 million ($9.4 million) last year.

Hopefluent's share price was on a roller coaster during the E-House bookbuild. The shares followed the broader market to decline to HK$6.04 on July 30, but bounced back and marked an all-time high at HK$7.20 on August 3. The shares lost ground again this week, closing around 5% down at HK$6.85 yesterday.

The E-House investment thesis is that urbanisation, a wealthier urban population and government reforms have driven - and will continue to drive - dramatic growth in the Chinese real estate industry. Sales revenues of Chinese primary properties grew at a compound annual growth rate of 37.9% from 2001 to 2005, according to CEIC Data, a company providing economic, sector and financial databases. Revenues within the real estate services industry doubled to Rmb1 trillion ($132 billion) in 2006 from approximately Rmb500 billion in 2004, as estimated by the China Real Estate Top 10 Committee.

ôEconomic growth in China is still strong making investors comfortable buying shares which directly participate in this growth, irrespective of market conditions,ö comments a source close to the deal with respect to the healthy demand for E-House. "Also, in some senses E-House provides less risky exposure to the property market than a developer who has to incur substantial capital expenditure and a time lag between starting and completing projects."

The real estate broker offered 14.6 million American depositary receipts (ADRs), or 19.6% of its enlarged share capital, at a price ranging from $11.50 to $13.50. Each ADR represents one ordinary share. Of the total shares on offer, 27.5% are existing shares which were sold by company directors and executive officers. Credit Suisse and Merrill Lynch were joint bookrunners.

E-House provides primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services in China. According to the China Real Estate Top 10 Committee, E-House was the largest real estate agency and consulting services company in the country from 2004 to 2006 with regard to the number of transactions facilitated, transaction value and gross floor area of properties sold and geographic coverage.

E-HouseÆs revenues grew at a CAGR of 34% for the period 2004 to 2006 and touched $56 million last year, while its net income increased at a CAGR of 80% in the same period, reaching $18.1 million in 2006. As much as 81.6% of its revenues came from its primary real estate agency services business.

Xin Zhou, the chairman and chief executive officer of E-House, owned 67.3% of the company prior to the listing. After selling some of his interest in the offering, his stake in the company will fall to 41.7%.

E-HouseÆs primary aim for the IPO is to create a public market for its shares to benefit its shareholders. It also hopes to retain employees by providing them with equity incentives and to obtain additional capital. The company plans to use approximately $10 million of the new proceeds to open new secondary storefronts and another $10 million to invest in information and operational systems.

The stock started trading in US markets on August 8. Its price surged more than 40% on the first day of trading, closing at $19.43.
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