Nearly 20 years after the first Chinese company listed in Hong Kong in 1993, the local stock exchange is set to make another mark in the history books with its first renminbi-denominated initial public offering.
Hui Xian Real Estate Investment Trust, which is sponsored by Li Ka-shing-controlled Cheung Kong (Holdings), will start selling units to both institutional and retail investors today and is scheduled to begin trading in Hong Kong on April 29. It is aiming to raise between Rmb10.48 billion and Rmb11.16 billion ($1.6 billion to $1.7 billion).
Hui Xian is ultimately controlled by a Hong Kong company, but its assets are based in China and all its revenues are in renminbi.
The IPO comes after Chinese regulators relaxed the rules on cross-border renminbi flows in June last year and marks yet another step in the internationalisation of the Chinese currency and the development of an offshore renminbi business in Hong Kong. The listing is highly awaited as the amount of renminbi-deposits in Hong Kong has grown rapidly to Rmb370 billion at the end of January, creating a need for investment products that provide a better return than a simple deposit account. Offshore renminbi corporate bonds have filled some of that demand since they started to appear last summer and have proved highly popular with investors. Equities that can provide an annual divided as well as potential capital growth are the logical next step.
Investors are keen to hold renminbi amid expectations that the Chinese currency will continue to appreciate by 3% to 4% per year in the foreseeable future. Meanwhile, the government is keen for foreign companies to accumulate renminbi so they can use it to pay for Chinese goods. In the long-run this would help reduce the inflow of dollars into China, where foreign exchange reserves reached a record $2.85 trillion at the end of 2010. For that to happen on a greater scale, though, companies will need to get a decent return on their holdings — beyond just the expected appreciation.
Some observers have noted that the pool of renminbi held in the Hong Kong isn’t large enough (yet) to create a liquid equity market, and in that respect, a yield-focused Reit is the perfect entity to start with since many of the buyers are long-term investors, such as pension funds or insurance companies, who buy to hold. On top of that, Li is highly respected and a vehicle sponsored by one of his companies should give investors a lot of comfort about this new instrument.
If the listing is successful, it is bound to be followed by others. Bankers say there are a number of other companies looking to launch renminbi-denominated IPOs. Most of them are said to be Reits, but as renminbi deposits in Hong Kong continue to grow — economists forecast they will triple this year to more than Rmb1.1 trillion — the opportunity to list common stocks should increase as well. Also, Hong Kong Exchanges and Clearing (HKEx), which operates the local stock exchange, is looking to introduce a renminbi trading support facility (TSF) that will allow investors to use Hong Kong dollars to buy renminbi-denominated stocks.
On its website, the HKEx notes that “the long-term growth and stability of the RMB stock market is subject to the challenge of whether there is sufficient and reliable RMB liquidity in Hong Kong. The TSF is designed to help overcome this possible hindrance and allow renminbi-denominated shares to develop without constraints arising from limited RMB availability at any given time.”
This backup facility will not be ready in time for the debut of Hui Xian, however, but might be rolled out in the second half of this year.
Hui Xian is offering 2 billion units, or 40% of its entire equity capital, at a price between Rmb5.24 and Rmb5.58. The price range translates into a 2011 dividend yield of about 4% to 4.3% (based on the joint bookrunner consensus), which compares very favourably to renminbi deposit rates in Hong Kong that range from 0.45% to 0.6%. It is also above the yield of most of the offshore renminbi bonds, commonly referred to as dim sum bonds. Of the 59 bonds issued so far, only four offer a coupon of more than 4%.
The indicated yield isn’t as high as that of other Hong Kong-listed Reits, which trade on an average 2011 yield of about 5.7%. However, these obviously don’t offer exposure to the renminbi. The only Hong Kong-listed Reit to have all its assets in China is Guangzhou Reit, which is significantly smaller than Hui Xian, both in terms of asset value and revenues. GZI Reit is currently trading at an estimated 2011 yield of about 7.1%.
The yield also translates into a 3% to 9% discount to net asset value, based on end-2011 estimates.
The new Reit will have a retail investor-friendly structure with 20% of the deal earmarked for the Hong Kong public, compared with 10% on most other IPOs. The clawback triggers are also unusually generous towards retail investors. The retail tranche only needs to be between five and 10 times covered for this portion of the deal to be increased to at least 40%. And if it is more than 10 times covered the retail trance will be increase to at least 50% of the total offering. As indicated by the words “at least”, the issuer will have the option to sell more units to retail investors, should it wish to do so.
However, sources say there has been strong interest from both high-net-worth individuals and institutional investors before the launch, so there is likely to be competition for the units. As noted, the retail offering will open for subscription today and will run parallel to the institutional bookbuilding. Both offers will close on April 19 and the final price is expected to be determined after the London close that day. The deal is not open to onshore US investors.
At the time of listing, Hui Xian will hold one property — the Oriental Plaza in Beijing, which is a mixed-use development that includes a shopping mall, eight grade-A office buildings, serviced apartments and the Grand Hyatt hotel. It is centrally located at the intersection of Wangfujing Street and East Chang’an Avenue, close to the Forbidden City and Tiananmen Square, and has been open since 2000. The mall accounted for 48% of the operating profit in the first 10 months last year, while the office towers brought in 35%. The Grand Hyatt and the services apartments are smaller contributors with 14% and 3% respectively.
The asset is valued by American Appraisal at Rmb31.4 billion. At close to 650,000 square metres it is twice the size of Hang Lung Properties’ Grand Gateway development in Shanghai, which is the most established mixed-use development in China. Hui Xian’s shopping mall, which has 100% occupancy, is also significantly larger than other shopping malls in the same area and is able to charge premium rents. Those rents are expected to increase further at an average 13% a year until 2013, as more than 50% of the leasable area is coming up for renewal this year and next.
However, with only one asset in its portfolio right now, Hui Xian’s ability to grow long-term is likely to depend on its ability to buy new assets and to undertake asset enhancements, which translates into diversification risks. According to a research report by one of the banks in the syndicate, there is “no guarantee that Hui Xian will be successful in growing through yield accretive acquisitions, as cap rates of investment properties in China have been hovering at historic low levels”.
Pre-IPO, Cheung Kong and its subsidiary Hutchison Whampoa own a combined 51.3% of Oriental Plaza. The other major owners are Bank of China and China Life Insurance, with 19.8% each, and Orient Overseas International with 7.9%. All the owners will be diluted proportionally through the issue of new units and at the time of listing Cheung Kong’s and Hutchison’s stake will have dropped to approximately 30.8%. It could fall slightly more if the 15% greenshoe is also exercised.
The IPO is arranged by BOC International, Citic Securities and HSBC.