Regional developer takes on tough IPO market

Central China Real Estate is being offered at a 35%-51% discount to NAV. The company is banking on its leading position in Henan province and its high-profile strategic investor to attract buyers.
Central China Real Estate has kicked off the institutional roadshow for what could become the first successful Hong Kong listing of a Chinese property company in more than six months. The company will be stressing its position as the leading residential developer in Henan, which is ChinaÆs most populous province and a laggard in terms of both urbanisation and property prices, as the key argument for why investors should include it in their portfolios.

Another positive should be the fact that SingaporeÆs leading developer, CapitaLand, has made two investments into Central China and holds just over 36% before the IPO. This should inspire confidence among other investors about the quality of the company and perhaps help them overcome the fact that the property market in Henan province is not that well-known by investors outside of China. CapitaLand isnÆt selling in the IPO and will be locked up for six months.

Central China is aiming to raise between HK$1.38 billion and HK$1.9 billion ($176 million to $244 million) and has set the price range to imply a discount of about 35% to 51% versus its pre-IPO net asset value of about HK$11 billion as estimated by syndicate analysts.

Towards the wide end, this could be the largest discount for a Hong Kong-listed Chinese developer at IPO ever, but the question is whether it will be enough to convince investors to commit money to yet another property company û and a fairly unknown one at that û at a time when most of its sector peers remain under pressure in the secondary market. Especially since several of the already listed developers also trade at 40%-50% discounts to NAV at present, giving investors a lot of choices if they want to get in at these levels.

Prior to yesterdayÆs launch some investors said they thought a discount of more than 50% would be necessary to get the deal out the door.

Central China is offering 25% of its share capital in the form of 500 million shares. All the shares are new as Chairman Wu, who owns the majority of the shares not held by CapitaLand, decided not to sell at this time. The price will range from HK$2.75 to HK$3.80.

As usual, the Morgan Stanley-led deal also includes a 15% greenshoe that could boost the total proceeds to as much as $280 million. Ten percent of the deal will be earmarked for retail investors in an offering that will open on May 26 û although their portion could increase if certain clawback triggers are met. The final price will be fixed after the US close on May 29 and the trading debut is scheduled for June 6.

While the price range values the listing candidate largely in line with its peers in terms of discount to NAV û KWG and Greentown both trade at a 48% discount, Shimao is at 46%, Agile at 42% and Aoyuan at 65% û it is looking more expensive on a price-to-earnings basis. Based on the research report forecast, Central China is coming to market at a 2008 P/E ratio of 7.2 to 9.9 times, which compares with 7.4 times for KWG, 7.9 times for Greentown, 5.9 times for Aoyuan and 12.9 times for Country Garden.

However, this may not matter as most investors are said to be looking at Central China on a discount to NAV basis.

Earlier this year, Changsheng China Property and Evergrande Real Estate Group were both forced to cancel their IPOs after a muted response from investors. Changsheng was in the market in January trying to raise no more than $144.5 million, while EvergrandeÆs March offering was a lot more ambitious at between $1.3 billion and $2.1 billion. Investors have been cautious about the Chinese property sector amid concerns that China will continue to tighten lending rates and cut back on the capital that banks are free to lend as it battles to contain inflation. Most mainland property plays have failed to join the general market rebound over the past two months.

Among Central ChinaÆs closest peers, China Aoyuan Property Group is down 61% from its highs (which it reached two days after its trading debut in early October) and yesterdayÆs close of HK$2.89 is also 44% below its IPO price of HK$5.20. KWG Property Holding is off 54% from its highs in October and Greentown China Holdings, which is the only other Hong Kong listed developer with some exposure to Henan province, has lost 55% in the past eight months. Even a large-cap stock like Country Garden, whose $1.9 billion IPO in April last year was extremely popular with investors, is down 55% from its late September highs, although yesterdayÆs closing price of HK$6.18 is still slightly above the HK$5.38 IPO price.

However, some observers argue that because sentiment for the sector is so weak at the moment, this could be exactly the right time to buy. Looking back a few years, Guangzhou R&F Properties and Shimao Property both came to market amid extremely difficult market conditions and at cheap valuations and only just managed to fill their order books. However, by the time the market peaked in October last year, the investors who did take a chance on these stocks during the IPO had seen their money increase significantly. Even now, R&F is 75% above its IPO price, while Shimao is up 117%.

ôIf you get in for the long-term, now is probably a good time to buy,ö says Kenny Ho, head of research for Jones Lang LaSalle in Shanghai, with reference not to Central China specifically, but to property companies operating in the less developed areas of China.

ôThere is always going to be a price differential between the markets in central China and the coastal cities as they have different income levels, different levels of GDP etc. But that said, these markets are just at the beginning of a construction wave and there is definitely a lot of upgrading demand. And because prices are much lower, I think there is still more room for growth, both in volumes and prices,ö Ho says.

Indeed, according to a syndicate research report, the average residential price in Henan is about Rmb1,400 per square metre, compared with about Rmb7,000 in Shanghai and Beijing, just over Rmb4,000 in Guangdong and Rmb2,500 for China on average. But supported by healthy GDP growth û HenanÆs economy grew at a compound annual growth rate of 14% in 1997-2007 versus 12% for China as a whole, 13% for Shanghai and 16% for Beijing û prices are expected to move higher.

ôThis is a laggard in the positive sense of the word,ö one source says, adding that in terms of migration into the cities ôthe big push is still to comeö in Henan.

Central China, which targets primarily middle-income earners with it property projects, says it will continue to focus on Henan pretty much exclusively with the aim of strengthening its leading position in this quite fragmented market. However, in the preliminary prospectus it does note that ôwhen suitable opportunities arise, we may make selective entries into other provinces in Chinaö. The company has a low gearing ratio of about 36% and thus quite a lot of room to invest more land for its future growth.

The listing candidate currently has 43 property projects at various stages of development and a land bank totalling about 7.6 million sqm of gross floor area. About 37% of that is completed projects, 10% is projects under development and the remaining 53% is land for future development. The company estimates that this will be sufficient to meet its development needs for the next three to four years. It has also entered into agreements related to land with an additional gross floor area of 2 million sqm, although it doesnÆt yet have any land use rights certificates for that land.

The company expects to record a profit of at least Rmb644.2 million ($92 million) this year, which would represent a growth of 290% from Rmb165 million in 2007. The syndicate research report is even more optimistic with a projection of 316% growth this year and another 49% in 2009, driven by a pickup in completions and unit sales.

In addition to the general market concerns, some investors may also chose to stay away from the company because of its relatively small offering size as this will typically suggest that the stock will be fairly illiquid. And that in turn would make it more difficult to exit quickly should the market take a sudden downturn.

The most recent Chinese property developer to list in Hong Kong was Zhong An Real Estate, which completed a $467 million IPO in early November, right around the time when the local market started to turn sharply lower. The stock traded above the IPO price on the first three days but has been on a declining trend ever since, losing 44% of its IPO value.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media