Shanghai's largest private sector property developer Shanghai Forte priced its IPO on Friday via lead manager Morgan Stanley. The company offered 638.3 million shares at HK$2.35 each, the top end of a revised indicative range of HK$1.80 to HK$2.35 per share.
With the inclusion of a greenshoe, total proceeds will rise to HK$1.75 billion ($225 million) and represent 34.5% of the company's outstanding share capital. The transaction had a split of 98.5% new shares and 1.5% old shares.
Retail books are said to have closed 480 times covered, prompting the maximum clawback to 50% of the deal. Institutional books closed at the $3 billion mark with demand from 250 accounts. However, the institutional oversubscription figure is fairly meaningless since all investors were capped at $30 million to prevent demand spiralling out of control.
The institutional book also comprised two sizeable corporate orders from Hong Kong property developers Cheung Kong and Sun Hung Kai. The two were allocated 10% of the institutional tranche and will not be subject to a lock-up.
The most significant aspect of the deal was its pricing flat to NAV. Last year, when HSBC tried to market a 455.9 million share deal for the company, it pitched it at a 15% to 30% discount to NAV.
But as analysts are quick to point out, NAV is a very subjective figure when dealing with the Hong Kong and Chinese property developers. Hong Kong property companies tend to amass large landbanks and sizeable investment portfolios generating low returns. Most Chinese property developers have much smaller landbanks and while some have investment portfolios, Shanghai Forte does not.
The company embodies the concept of a land factory. Depending on which side of the argument you sit, this means its asset base is either weak, or efficient and asset-light. Returns are generated by speed of throughput, with pre-sales funding completion. Because it sweats its existing assets well, gross development margins (25%), EPS and ROE (22% post issue) tend to be very high.
In 2003, HSBC had a hard time selling this concept to investors, most of whom were not prepared to make a leap of faith even though the company's earnings profile had been fairly consistent throughout its 10-year history. Morgan Stanley and co-manager Cazenove have clearly fared much better in 2004.
Largely this is because the whole sector has been re-rated in the interim period. Back in March 2003, Chinese property developers such as China Overseas Land were trading at discounts of up to 70% to NAV. During Shanghai Forte's roadshows, China Overseas was averaging a 10% discount and recently listed Beijing Land a 9% discount.
And as one specialist further argues, "If you strip the investment portfolios out of all these property companies, you'll find that they're valued at significant premiums to NAV. Shanghai Forte is an incredibly efficient developer. Its asset turnover is nearly twice as high as all the comparables and its NAV also expanded two-and-a-half times during 2003."
However, while the company appears expensive on an NAV basis, it is much cheaper on a P/E basis. Last year, it was marketed at 6.5 to 8.5 times 2003 earnings, a 20% to 30% discount to the sector. This year it priced at 11.8 times 2003 earnings and 9.9 times 2004 earnings. Beijing Land, which listed in June last year, priced its IPO at 11.78 times 2003 earnings and is currently trading at 17 times 2004.
So too on a price to book basis, the company has come flat to 2004 book estimates. Last year it was pitched at 1.3 to 1.7 times 2003 book.
What remains unchanged from 2003 is the dividend pay-out ratio equating to 40% of net income and a roughly 4% yield.