Jinmao seals IPO at bottom of range

Tight allocations for yield play, which failed to overcome concerns about the Chinese property market.

Hotels group Jinmao Investments and Jinmao (China) raised HK$3.2 billion ($414 million) from its Hong Kong listing on Wednesday after pricing a 600 million-share stapled unit deal at the bottom end of its indicative 30-cent range.

Negative sentiment towards the Chinese real estate sector meant the spin-off by Franshion Properties, a subsidiary of Sinochem, was always going to be a tough sell among general investors, even at HK$5.35 per unit. So unsurprisingly both the retail and preferential tranches of the initial public offering ended undersubscribed, sources familiar with the matter said. 

Retail investors applied for only 30% of the 60 million units on offer and the other 70% was clawed forward into the institutional tranche. An 80 million-unit preferential tranche for existing Franshion shareholders was sold as part of the institutional tranche, which closed just over two times oversubscribed.

Given that the institutional book was covered from day one of the bookbuild but failed to gain much momentum thereafter, the deal’s appeal was clearly limited to specialist investors, who had done their homework and were looking for an attractively priced yield play. The final order book held 70 lines, with the top-five investors receiving 60% of the institutional book and the top-10 investors 75%, according to sources close to the deal. 

The overall book comprised a mix of real estate investment trust specialists, Asia long-only funds, insurance funds, plus some high-net-worth investors and one sovereign wealth fund, which anchored the book at the bottom end of the price range. Four cornerstone investors were also allocated $40 million under a six-month lock up: Warburg Pincus, Shanghai Construction, Gordon Tang and his wife Chen Huaidan.


At HK$5.35 per share, Jinmao Investments has been priced on a 2014 estimated dividend yield of 9% and a 51.2% discount to net asset value. At this level, it has come at an 11% discount to the outer end of syndicate analysts’ 2014 dividend fair value estimates of 6.8% to 8.1%.

It has also been priced at a roughly 20% discount to a basket of comparable listed companies including Regal REIT, Langham Hospitality Trust, New Century REIT, Hui Xian REIT and Yuexiu Property.

“This deal is not everyone’s cup of tea but the company has extremely high-quality hospitality assets and this deal obviously offers great value,” one banker said.

A second said, “Franshion always wanted to price this deal to ensure a successful aftermarket.”

Assuming no greenshoe option is triggered that would release more shares into the market, Franshion will own 70% of Jinmao Investments and consolidate its financials into its own accounts after the IPO. Since the spin-off was announced in April, shares in Franshion have underperformed the market and are down 22% year-to-date, although it has ticked up 2% in the past two trading sessions.

The investment trust has, therefore, placed a holding company discount on its parent rather than unlocked value, as some analysts suggested it would when the deal first became public. But observers said Franshion made a very clear strategic decision to separate its hospitality business into a separate listing vehicle.

Jinmao Investments' portfolio includes eight five-star hotels and the commercial and retail complex Jinmao Tower in Shanghai, China’s second tallest building.

Joint bookrunners on the IPO are Deutsche Bank, DBS, HSBC, Morgan Stanley and Standard Chartered.

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