Against a difficult backdrop of pulled and delayed deals, Evergrande Real Estate yesterday successfully completed its initial public offering, raising HK$5.65 billion ($726.2 million) a year-and-a-half after its first attempt to go public. The company is due to start trading on November 5.
The deal priced at HK$3.50 a share, the middle of a price range that stretched from HK$3 to HK$4. A total of 1.61 billion shares were sold, split into 1 billion primary shares and 610 million secondary shares. This is slightly larger than the 1.51 billion shares that were initially on offer. The company increased the number of new shares in the deal last week to ensure it complied with stock exchange requirements related to its freefloat. In total, the shares represent 10% of the company.
One source said the deal was covered at the top of the price range, but the mid-point pricing was decided upon because it allowed the company to keep a batch of high-quality investors in the deal. The order book was described as highly international with investors from every region participating. Two cornerstone investors -- Joseph Lau's Chinese Estate and Cheng Yu Tung's Chow Tai Fook -- took $50 million worth of stock each.
Minus the cornerstones, the institutional tranche was around 10 times covered. And with the retail tranche 46 times covered, there was enough local demand to trigger a clawback that increased the retail portion of the deal to 30%, from 10% originally.
The final price values Evergrande at a 2010 price-to-earnings ratio of 5.5 times, on a pre-money basis. It also puts the company at a 48.5% discount to its estimated 2010 net asset value (NAV), also on a pre-money basis.
While this is cheaper than the valuation for the first Chinese property developer to list in Hong Kong this year, it is pretty much in line with more recent deals. When Glorious Property Holdings raised $1.28 billion in September it had the advantage of being the first-mover. As such, it priced its deal at 10.4 times projected 2010 earnings.
At the beginning of October, Powerlong Real Estate Holdings priced its IPO below the indicative range, thus shrinking the deal to $355 million. The final price valued the company at 6.3 times projected 2010 earnings and at a 53% discount to NAV. And, earlier this week, Yuzhou Properties priced its $209 million IPO at 5.2 times 2010 projected earnings and a 50% discount to NAV.
That said, at least Evergrande completed its transaction. On Wednesday, Excellence Real Estate Group abandoned its $1 billion IPO and the market is still waiting to hear what has happened to Mingfa Group (International), a developer with properties in Fujian and Jiangsu. Mingfa was supposed to price on Wednesday, but the company is still deciding whether to go ahead with the listing.
With operations in 24 cities, Evergrande is one of China's largest property developers. Since the company was established in 1996, it has built up a landbank with a gross floor area of 51.2 million square metres.
Investors were said to be attracted to its standardised business model, which not only gives the company pricing power it can use against its suppliers, but also allows it to turn an empty plot of land into a revenue-generating project in just six months. It was also attractive due to its national scope, which diversifies risk away from just one or two geographical areas. And the deep discount made it look like value for money.
Nearly one-third of the net proceeds will be used to repay part of a $500 million structured secured loan that the company took out with a Credit Suisse-led group of creditors in 2007. At the moment, Evergrande is weighed down by $1.5 billion worth of debt. Another 63% of the cash will be used to pay for outstanding land premiums and to finance existing projects. The remainder will go towards working capital.
Bank of America Merrill Lynch, BOC International, Credit Suisse and Goldman Sachs were joint bookrunners for the IPO.