longfor-keeps-valuations-high-for-ipo-of-up-to-916-million

Longfor keeps valuations high for IPO of up to $916 million

The company is banking on a strong brandname and its transformation into a nationwide player as a way to draw investors into the deal.

Longfor Properties will kick off the roadshow today for an initial public offering that is seeking to raise between HK$6.06 billion and HK$7.1 billion ($782 million to $916 million). Coming on the heels of several other property IPOs that have failed to attract much interest from investors, the launch may seem somewhat brave and the company is also upping the ante by ignoring the fact that other listing candidates have been forced to come at increasingly lower valuations and is offering its shares at a much more expensive price.

Analysts and bankers involved in the deal are arguing that Longfor deserves a higher valuation than the other Chinese property companies that have sought a Hong Kong listing over the past couple of months because of its strong brand name and its transformation from a regional developer based in Chongqing in western China into a nationwide player with significant market shares in Chengdu, Beijing and Shanghai. It also enjoys a high customer loyalty, which enables it to command premium pricing, according to one syndicate research report.

Still, in light of the recent pickup in volatility in global equity markets - Wall Street fell 2.5% on Friday, losing all the gains made on the back of strong GDP data the previous day - the relatively aggressive valuations do seem a bit on the brave side.

According to sources, Longfor is aiming to sell 20% of the company, or 1 billion new shares, at a price between HK$6.06 and HK$7.10, which translates into a 30% to 39% discount to the estimated 2010 net asset value and 12 to 14 times the projected earnings for next year.

This compares with the 48.5% discount to NAV and 5.5 times price-to-earnings multiple at which Evergrande Real Estate priced its IPO last week. Evergrande was the most successful of the four property developers that were due to price their respective IPOs last week, as indicated by the fact that it was able to price the deal at the mid-point of the indicated price range and that retail demand was strong enough to trigger a clawback that increased the retail tranche to 30%.

Excellence Real Estate Group chose, after completing the bookbuilding, to withdraw its IPO, which had sought to raise up to $1 billion. The Shenzhen-based developer cited the "current market conditions for IPOs" as a reason not to proceed according to the original timetable. And on Friday, Mingfa Group (International) said it will relaunch its IPO at a revised price range which will reduce the maximum deal size to $335 million from $440 million, again citing market conditions (see separate story on our website today).

Excellence, which was being brought to market by ICBC International, Morgan Stanley and UBS, was offering its shares at a 28.9% to 40.6% discount to its 2010 NAV and at a P/E multiple of 7.5 to 9.3 for that same year. Mingfa, whose deal was led by Bank of America Merrill Lynch, Bocom International and Deutsche Bank, was originally offering its shares at a 50% to 60% discount versus the estimated 2010 NAV and at a 2010 P/E multiple of 7.3 to 9.1.

The only other property company to successfully price its offering last week was Yuzhou Properties, a residential developer based in the Fujian province. The company fixed the price at the bottom of the range, which translated into a 2010 P/E multiple of 5.2 times its projected earnings for 2010 and a 50% discount to the estimated NAV for the same year.

Clearly, there are investors who are prepared to pay the price Longfor is asking for though, as sources say the company has already signed up five cornerstone investors, which will buy a combined $197.5 million worth of shares. Depending on the final price, this means that between 21.6% and 25.3% of the deal is already covered. The five investors are Temasek and Government of Singapore Investment Corp, which will each invest $50 million; Hongkong Land, which is buying $37.5 million worth of shares; and Ping An of China Asset Management and BOC Group Investments, which will each take $30 million. The cornerstones will all be locked up for six months.

Another 10% of the deal is being earmarked for Hong Kong retail investors.

Longfor has been the leading residential developer in Chongqing for the past three years and is a top three player in both Chengdu and Beijing in terms of contract sales of residential properties. It is also active in Xi'an, which together with Chengdu is one of the most populous and affluent cities in western China, and this year it has entered the Wuxi, Shenyang and Changzhou markets. The company's aim is to continue to expand its national footprint in other selected high-growth areas throughout China, including the Pan Bohai Rim and the Yangtze River Delta, and to become a respected and trustworthy national market leader.

Its projects include a wide range of middle-to-high end developments, including high-rise apartment buildings, low-rise garden apartments, townhouses and luxury stand-alone houses, targeted at the mass market and middle class as well as the upper class. It has also developed several mid- to large-scale shopping malls and other commercial properties.

In a pre-deal report, analysts who are part of the syndicate say they view the company as a candidate to jump from second-tier to first-tier status in light of its "competitive products, prestigious brand name, attractive geographical exposure with reasonable land cost, scalable organisation structure, and proven expansion capability and differentiating development strategy."

A separate report adds "a clear and visionary leadership, a good financial position and high predictability of financial results, and a government policy favouring western China" as other selling points.

Longfor has a landbank of 20.1 million square metres of gross floor area, of which 16.8 million sqm are attributable to the company, and has completed 15 residential and commercial projects to date.

Longfor is due to fix the final price on November 11, New York time, and is scheduled to start trading on November 19. Citi, Morgan Stanley and UBS are the joint bookrunners. 

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