Market rebound may be too late for Evergrande

The property developer is finding it tough to lure investors to its IPO as sector peers tumble by up to 30%.
The slight rebound in the Hong Kong stockmarket yesterday, better-than-expected earnings from two major investment banks and a three-quarter point rate cut in the US overnight is likely to have come too late to rescue the latest Hong Kong initial public offering.

Evergrande Real Estate Group, which is in the market with a $1.3 billion to $2.1 billion offering, has been struggling to attract enough investors as sentiment for Chinese property stocks remains poor amid concerns of more cool-down measures and rate hikes. Share prices of its closest comps have tumbled 20%-30% during the roadshow, virtually wiping out EvergrandeÆs entire valuation discount and destroying one of the key attractions of the deal.

The institutional portion of the offering will stay open until 5pm New York time today, but according to sources, there is little chance that the final day will produce enough orders to fill the book.

ôIf it was a question of dealing with one or two down-days in the market, the pricing might have been extended or delayed by an extra week, but this is not one of those cases,ö says one source. ôInvestors simply arenÆt comfortable with putting money into a new company when everything around it is falling.ö

In this respect it obviously didnÆt help that China Railway Construction Corporation, which is the only really successful IPO in Hong Kong this year, closed below its issue price for the first time yesterday after four days of trading. Oil rig manufacturer Honghua Group, which debuted on March 7, is currently trading 40% below its IPO price.

Last week China Pacific Insurance decided not to pursue its Hong Kong listing plans after five days of pre-marketing that coincided with the worst weekly performance for the Hang Seng Index in seven years. Again, the deal was hampered by sharp falls in the share price of other Chinese insurers and the fact that the pricing flexibility on the downside was limited by a floor price that couldnÆt be undercut. The insurance company was looking to raise at least $3.2 billion from the H-share offering.

Another four Hong Kong IPOs were pulled in January after completing the entire bookbuilding and several other listing candidates have simply decided to hold off on launching their deals while waiting for the market to stabilise.

Bucking the negative trend, rice cracker manufacturer Want Want was, however, able to complete its IPO at the bottom of the range over the weekend, raising a total of $1.04 billion. The company, which was brought to market by BNP Paribas, Goldman Sachs and UBS, is due to start trading on March 25.

Yesterday morning Evergrande said in a statement that it would keep its 10% retail offering open for an extra day until noon today to allow potential investors more time to make their investment decisions. The additional time would also give investors a chance to get their return cheques from China Railway ConstructionÆs IPO, which was heavily oversubscribed and tied up a lot of retail cash. The announcement caused some initial optimism that the deal would pull through, although it appears that the extension may have been mostly cosmetic as the institutional book remains far from covered and retail investors were never going to be able to carry a deal of this size.

Evergrande is offered at a price between HK$3.50 and HK$5.60, which indicates a discount of 46% to 65% versus the companyÆs estimated net asset value, or a 2008 price-to-earnings multiple of 5.8 to 9.3 times based on average syndicate forecasts. When the deal was launched on March 6, this represented a significant discount to its peers, but since then, Chinese property stocks have fallen completely out of favour and analysts say there are now several other listed developers that can be picked up at similar valuations.

Among the key comps, China Overseas Land & Investment has fallen 23%, Guangzhou R&F Properties 25%, Hopson Development 26% and Agile Property 29%.

On top of this, the company has been in the market in a week when investors have also had to digest the collapse of Bear Stearns, violent protests in Tibet and a flu scare that closed down all Hong Kong primary schools for two weeks. Yesterday, China also raised its reserve ratio requirement for banks by 50bp from March 25, which is likely to add to the woes of developers who are already facing strict lending policies. The tightening will require most banks to keep 15.5% of their total assets as a reserve.

The Hang Seng Index has lost 7.5% of its value during the marketing of Evergrande and despite a slight rebound yesterday it closed below 22,000 points for the second straight day. This is the first time since August 21 that the index has been at these levels and with a 23% loss since the beginning of this year, Hong Kong is tied with the Philippines as the worst performing market in Asia year-to-date after Shanghai and Hanoi.

The US market staged a rebound overnight, however, despite some initial disappointment that the Federal Reserve trimmed its benchmark Federal Funds rate by only three-quarters of a point. Before the announcement the futures market was indicating an 88% chance of a 1% cut. But the share prices rebounded quite quickly as investors chose to focus instead on the first quarter earnings from Goldman Sachs and Lehman Brothers, which were well below last yearÆs profits but beat analystsÆ expectations by a significant margin. The Dow Jones Industrial Average finished 3.5% higher, which should allow for a sizeable bounce in Asian markets today.

This is unlikely to be enough to save Evergrande, but could help Wing Fat Printing as its offering is much smaller. The spin-off from Hong Kong-listed conglomerate Shanghai Industrial Holdings, which makes printed packaging material for the tobacco and alcohol industry, is seeking to raise between HK$607.5 million and HK$690 million ($78 million to $88 million). The institutional portion of this IPO is also due to close at the end of New York trading today, while the retail offering closed at noon yesterday. BNP Paribas and UBS are the joint bookrunners.

Evergrande is being brought to market by Credit Suisse, Goldman Sachs and Merrill Lynch. The developer, which focuses primarily on second-tier cities, is offering 2.96 billion shares, or 20.8% of the company. Just over 96% of the shares are new. Deutsche Bank, Merrill Lynch and Temasek, which bought into the company in November 2006 through convertible preference shares, werenÆt due to sell any shares through the IPO.

The company, which began operations in Guangzhou in 1996, currently owns 45.8 million sqm of development land (measured by gross floor area) in 22 cities. This is by far the largest land bank that any Chinese developer has sported at the time of their initial public offerings. Country Garden, which was the largest before this, had a land bank of just under 19 million sqm when it came to market in April last year.

Evergrande is planning to ramp up its production this year with syndicate analysts projecting the completion volume to increase to about 7.5 million sqm of saleable gross floor area (GFA) in 2008 from only 400,000 sqm in 2007. This should result in a massive boost to the bottom line, they say. The analysts estimate a net income of Rmb7.5 billion to Rmb8 billion ($1 billion-$1.1 billion) this year, versus Rmb1.1 billion in 2007.
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