Real estate broker E-House seeks US listing

Marketing itself as a prime beneficiary of ChinaÆs property market boom, E-House aims to raise up to $197 million.
Chinese real estate services company E-House Holdings yesterday launched the roadshow for a US initial public offering that aims to raise up to $197.1 million.

The real estate broker is offering 14.6 million American depositary receipts (ADRs), or 19.6% of its enlarged share capital, at a price ranging from $11.50 to $13.50. Each ADR represents one ordinary share. Of the total, 27.5% are existing shares which will be sold by company directors and executive officers through a couple of jointly held investment companies. Credit Suisse and Merrill Lynch are the joint bookrunners.

E-House provides primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services in China. According to the China Real Estate Top 10 Committee, E-House was the largest real estate agency and consulting services company in the country from 2004 to 2006 with regard to the number of transactions facilitated, transaction value and gross floor area of properties sold and geographic coverage.

The real estate broker argues that urbanisation, a wealthier urban population and government reforms have been the drivers of dramatic growth in the Chinese real estate industry in recent years. Sales revenues of Chinese primary properties grew at a compound annual growth rate of 37.9% from 2001 to 2005, according to CEIC Data, a company providing various economic, sector and financial databases. Revenues within the real estate services industry doubled to Rmb1 trillion ($132 billion) in 2006 from approximately Rmb500 billion in 2004, as estimated by the China Real Estate Top 10 Committee.

ôThis is not a pure property play, but somewhere between consumption and real estate,ö says a source. ôThe growth of the company will probably be driven by the boom of the Chinese property market as well as increasing wealth of the population.ö

According to another source, E-House is more leveraged to the growth of ChinaÆs property market than a traditional property company as property development involves time and substantial capital investment. There is often a time-lag for developers to capture gains while the property market picks up.

ôWhen the property market booms, the first to benefit are always the property broking agenciesö, says the source.

Administrative measures by the Chinese government are typically a chief concern among investors who put money into the Chinese property sector. Although almost every single Chinese developer argues that those stabilising measures are essential to ensure healthy growth of the countryÆs property market in the long run, these measures inevitably result in short-term downward adjustments and uncertainty in the market.

Administrative and monetary measures are the most common tactics for the Chinese government to cool its feverish economy, let alone the property market. Following strong gross domestic product growth in the second quarter and a spike in the headline consumer price index in June, the Chinese government raised both the benchmark one-year lending and deposit rates by 27 basis points last week. The one-year lending rate rose to 6.84% and the 1-year deposit rate was increased to 3.33%. A statement by the central bank said the move was meant to keep credit expansion and investment growth in check, to stabilise inflation expectations and to maintain stability in general price levels.

E-House also faces intense competition from local firms such as World Union Real Estate Consultancy (China) and Hopefluent Group, as well as other large national players and international firms such as Jones Lang LaSalle and Century 21 China Real Estate. Compared with property development, the provision of real estate services does not require significant capital commitments. Low entry barriers allow new competitors to enter the market with relative ease.

The stock price of Hong Kong-listed peer Hopefluent has experienced a sharp rally over the past two months, surging over 80% from early June to hit a record high of HK$6.70 on July 20. It has traded down a bit this week, however, and closed at HK$6.50 yesterday.

E-houseÆs price range values the company at 24.1 to 28.2 times its 2007 earnings, or at 15.6 to 18.2 times its 2008 earnings pre-greenshoe, according to a source close to the deal. This pitches it at a premium to Hopefluent, which trades at price-to-earnings multiples of 17.3 times for 2007 and 13.5 times for 2008. Hopefluent is smaller in terms of geographic coverage and annual income, however, as it mainly focuses on the Guangdong market and recorded a net profit of HK$73.5 million ($9.4 million) last year.

E-houseÆs revenues grew at a compound annual growth rate of 34% in 2004 to 2006 and hit $56 million last year, while its net income increased at a CAGR of 80% in the same period, reaching $18.1 million in 2006. As much as 81.6% of its revenues came from its primary real estate agency services business.

Xin Zhou, the chairman and chief executive officer of E-house, held 67.3% of the company prior to the listing. After selling some of his interest as part of the offering, his share of the company will fall to 31.5%.

According to the preliminary prospectus, E-HouseÆs primary aim with going public is to create a public market for its shares to benefit its shareholders. It also hopes to retain its talented employees by providing them with equity incentives and to obtain additional capital. The company plans to use approximately $10 million of the new proceeds to open new secondary storefronts and another $10 million to invest in information and operational systems.

The final price will be determined on August 7 and trading debut on the New York Stock Exchange is scheduled for August 8.
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