Renhe placement attracts international players

A group of five existing shareholders teamed up to sell HK$756 million ($97 million) worth of shares in Renhe Commercial Holdings last night, and contrary to the company's initial public offering in October last year, this deal did get the attention of international institutions.

The 15% discount helped to rope in people, but the strong share price performance since listing and the fact that it has become a liquid stock also played a role in getting investors to place orders. In the end, more than 50 accounts participated in the deal, which accounted for 2.3% of the company and five to six days worth of trading volume.

Many investors would have been surprised (and intrigued) by the claim on the term sheet that Renhe, a private-sector developer and operator of underground shopping centres in China, ranks as China's third largest real estate developer in terms of market capitalisation, but a quick look at the charts shows that the stock has staged an impressive rally since it came to market. Most of the gains has taken place since the beginning of January, and by late February the share price was double the IPO price of HK$1.13. Since then it has come back slightly and for the past few weeks has traded around HK$2. Yesterday's close of HK$1.98 equals a 75% gain since listing and a market value of $5 billion.

Admittedly this is from a low base as the IPO price valued the company at only 4.2 times the consensus syndicate earnings forecast for 2009, but in light of the much more modest gains of 5%-15% for other favoured property stocks like Guangzhou R&F Properties, Shimao Property and Country Garden it is still noticeable.

Sources say part of the reason for the strong gains is that there have been few sellers of the stock, which is perhaps not surprising since the IPO attracted only a token interest from international investors and the retail community in Hong Kong and, as a result, the down-sized deal was placed primarily with Chinese institutions, corporates and individuals -- many of which had ties to the company or the owner.

However, this isn't the entire story since trading volumes have also been picking up; from about 13 million-14 million shares per day a couple of months ago to around 80 million shares a day over the past couple of weeks. Yesterday saw a record 133 million shares change hands, which suggests that news of the upcoming placement may have leaked. The share price fell 2%. Until now though, sources say the buying has been largely retail-based and the stock has also become a target for day-traders, making last night's placement the first time Renhe's shares have been distributed more widely among international institutions.

To be sure, the company did have some international institutions on its shareholders' registry before last night. Warburg Pincus supported the IPO as a cornerstone investor by buying $50 million worth of shares and a group of external investors, including New World Investors, Capital Funds, Global Giant Enterprises and venture capital firm Sequoia Capital bought into the company on a pre-IPO basis in late 2007 and early 2008.

The sellers -- identified only as five non-affiliated parties unrelated to each other -- offered 450 million shares at a price between HK$1.68 and HK$1.82, or at a discount of 8.1% to 15.2% versus yesterday's close. The range was wide, perhaps in the hope that a few large buyers, or perhaps retail-type accounts, may emerge and help narrow the gap to the market price, but in the end it seems most buyers were unwilling go beyond the HK$1.70 level and the price was fixed at HK$1.68 for the maximum 15.2% discount.

The book was slightly oversubscribed, but not sufficient enough to exercise the upsize option, which could have increased the deal by a further 95 million shares to a total of 545 million. One of the sources noted that since this was really the first time that this stock was going into public hands on a larger scale, it was important that it was "properly placed" and increasing the size may have resulted in more shares going to short-term players.

According to the term sheet, joint bookrunners BOC International and UBS initially planned to keep the order books open until 9pm Hong Kong time to give US investors a chance to participate, but after receiving few early indications of interest, they closed the deal at 7.30pm. Some European investors did participate though. Otherwise the book was a mixture of different types of accounts, including some large-cap investors who were attracted by the idea that Renhe's large market cap relative to the sector will eventually see it included in various indices, and some real estate specialists, as well as ordinary long-only funds and hedge funds.

The stock has become more visible this month as BOCI, HSBC, and UBS have all initiated coverage on the company, while CLSA has drawn attention to it in a property research piece. Except for CLSA, these banks were all joint bookrunners of the IPO (together with Morgan Stanley).

UBS is the most positive with a buy recommendation and a target price of HK$2.60, implying a further 30% upside from current levels. BOCI also recommends investors to buy, but its target price is lower at HK$2.16. HSBC has a target price of only HK$1.24, however.

CLSA is not providing a target at all, in fact it doesn't yet cover the stock, but after a visit to the company's underground mall in Guangzhou, analyst Aaron Fischer says he is "very impressed" and the company is now on the firm's radar screen. He concludes that the company has "exciting growth prospects", but adds that valuation work is required as the stock has gained so much since the IPO and may be pricing in a lot of good news already.

Renhe falls somewhere in between the commercial real estate and retail sectors. It operates shopping malls, primarily for clothing and accessories, but doesn't get a percentage of the sales generated by its tenants. At the same time, it isn't legally classified as a developer since all its malls are built as civil air defence shelters and as a result the company is exempted from land use right premiums, land appreciation tax and property tax - giving it a distinct advantage over the traditional developers of commercial properties. It doesn't own any land bank, but rather has operational rights for the facilities it builds for 40 years.

Among the key investment arguments at the time of the IPO were the company's high earnings growth and impressive margins. By placing its malls under ground, Renhe is also able to gain access to prime commercial areas in cities where land supply above ground is limited, giving it another leg up on the operators of traditional malls.