Listing candidate banks on prime property locations

China Properties Group, a spin-off from previously privatised Pacific Concord, seeks up to $271 million from Hong Kong IPO.
China Properties Group yesterday kicked off a roadshow that will make it the latest among a string of Mainland property developers to list in Hong Kong over the past 18 months.

The management will argue, however, that the strategic location of its residential and commercial projects sets it apart from the competition. This includes a prime stretch of land along ShanghaiÆs Nanjing West Road û one of the busiest and most well-known shopping streets in the city û where it is planning to develop a high-quality integrated residential and commercial project with a gross floor area of 409,000 square metres under the name of Concord City.

According to investors who attended the management presentation in Hong Kong yesterday, the company also claims to have a relatively cheap source of land as most of it has been acquired through negotiation rather than by auction. The Nanjing Road project is a case in point as this land has been bought block by block over the years, one source says.

Another attractive point, observers say, is the fact that all the land in the companyÆs portfolio has already been cleared, meaning there are no relocation issues to deal with that could push up the costs.

China Properties is looking to raise up to HK$2.12 billion ($271 million) from the sale of 25% of the company. The deal consists of 450 million new shares which are offered at a price between HK$3.50 and HK$4.70 apiece. As usual, there is a 15% greenshoe, that could boost total proceeds to $312 million if fully exercised. Ten percent has been earmarked for retail investors, although this could increase to as much as 50% in case of strong retail demand.

The price range values the company at a discount of between 31% and 47% versus its post-money net asset value, according to one source. The discount for other Mainland developers listed in Hong Kong varies widely, but most of them do fit within a 25% to 50% bracket.

A price at the top of the range for a discount to NAV in the low 30s would pitch China Properties in line with developers like China Greentown, Hopson Development (both trade at a 30% discount) and SPG Land (32%), but make it more expensive than Agile Property Holdings (36%) and Shanghai Forte Land (47%), according to calculations made by the source.

Merrill Lynch is sole bookrunner for the deal, with Cazenove Asia as joint sponsor and joint lead manager. According to sources, Cazenove was brought in to comply with a rule that prevents investment banks that hold a substantial stake in a listing candidate from being the sole sponsor of the IPO. However, it was a bit unclear whether that rule would actually apply in this case as Merrill wonÆt hold any shares at the time of listing.

The US investment bank, through an entity called Indopark, bought a 4.87% stake in China Properties for $50 million in April last year, but has entered into a repurchase agreement which will see the company buy back all those shares for $55 million the day after the IPO price has been fixed. The payment will initially be done through a loan note issued to Indopark, but according to the preliminary listing document the company will then use about HK$429 million ($55 million) of the net IPO proceeds to settle the full amount due under the note.

The rest of the proceeds will be used to finance the companyÆs two ongoing developments, to repay a HK$332.9 million short-term loan from Wing Hang Bank which carries an interest rate of 8%, to fund the acquisition and development of future projects and for working capital.

The timing of the IPO may seem a bit brave, given that it comes only a couple of weeks after Beijing said it would start to collect a land appreciation tax from this month. Several of China PropertiesÆ listed peers have also been on a volatile but generally declining trend since early December after gaining strongly in the previous five months.

The management told investors on the first day of the roadshow that it has already made provisions for the LAT and therefore didnÆt see this as much of an issue. However, one fund manager noted that the companyÆs own claim that it has bought its land cheap could leave it exposed to more LAT charges in the future, as could its focus on upscale residential properties.

Another issue the management will have to deal with is the fact that some of the IPO assets have already been listed in Hong Kong under the name of Pacific Concord. However, controlling shareholder and Chairman Wong Sai Chung privatised that company through a voluntary conditional share offer in 2003 as he felt the stock was both undervalued and highly illiquid. The shares were bought back at a 51% premium over the market price, but at a 64.5% discount to the adjusted net tangible asset value.

Since then the asset value of the various property projects originally in Pacific ConcordÆs portfolio has increased substantially and when part of the company is now spun off to investors in the form of China Properties shares it will be at a significantly higher valuation.

ôSome investors are likely to have a negative opinion about the company because of the privatisation, especially those who used to own Pacific Concord shares,ö says one asset manager. ôMr. Wong is a very shrewd businessman and he must have made a lot of money on that privatisation,ö he adds.

However, one banker close to the company noted that a privatisation is the right thing to do to if the market doesnÆt give the company a fair valuation. ôAs long as you pay a premium when you buy the shares there is nothing wrong with that. Property prices have risen a lot since then so he has made money, but if the market had gone the other way as it did during Sars, nobody would have criticized the buyout,ö he says.

Aside from its Concord City project, China Properties is also developing a large-scale residential and retail community in ShanghaiÆs Minsheng district. The project is in four phases û all with its separate theme - and as of September last year, the company had sold and pre-sold more than 90% of each of the first three phases and 27.3% of the final one. The project, called Shanghai Cannes, is expected to comprise a GFA of about two million sqm when finished.

In the future, the company plans to retain an increasing proportion of its properties as an investment and as a way to broaden its revenue base and achieve a source of recurring income that is more stable than the pre-sales revenues.

In the first nine months of 2006, the companyÆs revenues amounted to HK$839.6 million ($108 million), which compared with HK$1.25 billion in the full year 2005. However, the net profit increased to HK$215.9 million in the first nine moths last year from HK$142.7 million in the whole of 2005.

Shanghai Cannes fits in with the companyÆs aim to locate its mid- to high-end residential projects in suburban areas of major cities that offer convenient transportation, particularly through subway or railway. Similarly, it will only develop commercial properties in areas that are among the most well-known retail areas in a city in order to attract customers who are interested in luxury goods and services.

The company also holds options to acquire three other projects from Wong, who will still hold 75% of the company post listing û or 71.25% if the greenshoe is fully exercised. These include a retail street project in Kunshan International City near Shanghai, a retail and residential project in Beijing and a residential project also in the capital named Beijing Cannes. However, there are still plenty of uncertainties as to whether these projects will happen û the Kunshan site may for instance be re-designated as parkland - meaning investors are unlikely to attach any value to those options at this stage.

The price is expected to be fixed on February 14 and the trading debut is scheduled for February 23.

¬ Haymarket Media Limited. All rights reserved.
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