Shimao sets price range for IPO at wide discount to NAV

The tough market environment is said to have prompted investors to reduce order sizes and push prices downward, but those deals already in the market are supposedly getting done.
Shimao Property Holdings will go ahead and launch the formal roadshow for its initial public offering today despite a sharp sell-off among mainland property stocks yesterday as concerns about US interest rates and inflation intensified.

The difficult market environment will be reflected in the price range, however - which will be set to value the company at a discount not only to most of its listed peers but also to Shui On Land, which is in the market trying to raise $989 million in a separate IPO, according to sources.

One source said Shimao, which is brought to market by Goldman Sachs and Morgan Stanley, will offer its shares at a price between HK$6.25 and HK$8.50, which will give a total deal size of HK$3.72 billion to HK$5.06 billion ($480 million to $650 million).

Such a range would value the developer at discount to net asset value (NAV) of 29-45%, which is at the generous side compared with its already listed peers that tend to trade at discounts between 20% and 40%. Valuations have come off over the past few weeks, however, making some players now seem unusually cheap.

Under normal circumstances ShimaoÆs extensive land bank, solid earnings growth forecasts, strong partners and diversified portfolio of high-end residential projects, hotels and retail space would make the stock attractive at the wide end of that discount range. But given how volatile markets are at the moment there is a risk that the competitors will continue to cheapen, reducing that advantage, observers say.

This is pretty much what has happened for both Shui On Land and smaller player Yanlord Land Group, with sources saying the latter had seen investors reduce the size of their orders (or pull them altogether) during the back end of the bookbuilding as the valuation gap was being eroded. Both deals are said to be fully covered, but it is widely expected that investors will have driven the pricing towards the bottom of the respective offering ranges.

All eyes are now on US CPI data that are due for release later today (June 14). The data have the potential to spark a rebound in global equity markets if the numbers suggest inflation is under control, leaving little need for anther rate hike beyond the one expected this month.

Another set of strong inflation data, on the other hand, would likely accelerate the sell off, market watchers say.

The latest setback for Mainland developers this week was also partly prompted by suggestions that the Chinese government may impose restrictions on foreign investments into the countryÆs real estate sector û a move that analyst say would have the most impact on high end developers like Shimao and most of the other Mainland property companies listed in Hong Kong.

Stone Shi, a property analyst with Sun Hung Kai Securities, notes that the real impact from such a policy û if it was to be implemented û wonÆt have much impact on the overall market, however, as foreign direct investments account for only about 5% of total transaction volumes.

ôThe most important implication of such talk is that the policy measures (to stabilise the property market) arenÆt over yet,ö Shi says.

On a PE basis, the price range will value Shimao at about 12 to 16.4 times its 2006 earnings, based on syndicate forecasts, which at first glance looks less compelling against some of its rivals after the recent share price decline.

However, ShimaoÆs earnings projections are said to be quite conservative as they include a full provision for land appreciation taxes, even though it is unclear whether the company will ever have to pay such a tax. Many of its rivals, including Shui On, donÆt make such provisions, or make them only in part.

As of yesterday, China Overseas Land was trading at a 2006 PE multiple of 14.6 times. China VankeÆs B shares were quoted at 12.5 times and Guangzhou R&F - which lost 13% on the day to bring its decline for the past six days to a hefty 26% - has seen its 2006 PE multiple ease to 10.1 times.

Just over a week ago when Shimao launched pre-marketing these three stocks traded at forward PE multiples between 13 and 17 times.

Shui On Land, which has two days left of its bookbuilding, is offered at a price range that values the company at a discount to NAV of roughly 13-30% based on consensus projections, or at about 13.7 to 18 times its projected forward earnings. Deutsche Bank, HSBC and JPMorgan are joint bookrunners for the offering.

Yanlord, which closed the books for its up to $270 million IPO yesterday and is due to fix the price today, was being pitched at a 20-35% discount to NAV and at 10 to 12.7 times its projected 2006 earnings. The company, which is brought to market by CLSA and HL Bank, will be listing in Singapore, but has all its real estate operations in the Mainland.

Like Shui On Land, Shimao focuses on large-scale community style projects and has a solid track record and a well-established brand. Contrary to its rival, which specialises in redevelopment and modernisation of already existing but run-down urban districts, however, Shimao usually buys raw land for its new developments which means it doesnÆt have to deal with any relocation of exiting tenants.

Having made a name for itself in Shanghai, where its flagship residential project, Riviera Garden, is located, it currently has 15 residential projects, spread over 10 cities. With a landbank of about 13.8 million square metres of gross floor area at the end of March, the company is one of the largest property companies in China. Nationwide developers China Vanke and China Overseas have land banks totaling 11.7 million and 11.0 million sq.m respectively.

Shimao aims sell 20% of the company in the form of 595 million new shares. Of the total, 10% has been earmarked for retail investors while another 5.9% will be offered to existing shareholders of sister company Shimao International Holdings at a rate of one new share for every six they currently own.

There is a 15% greenshoe that could boost the total proceeds to HK$5.8 billion ($750 million) in case of strong demand.

In 2005, the companyÆs net profit jumped 392% to Rmb908 million on turnover of Rmb2.5 billion ($312 million), which was largely due to revaluation gains on investment properties. Going forward, however, the companyÆs large and cheap land bank is expected to support a sustainable growth in income from pre-sales and underpin bottom-line earnings growth of at least 40% in the years to 2009, sources say.

The company, which was founded by chairman Hui Wing Mau in 2001, is supported by four financial investors, including Morgan Stanley, Standard Chartered, China Construction Bank and Drawbridge Capital, which were brought in about six months ago and owned a combined 16% before the IPO.

ShimaoÆs order books will remain open until June 27 and the price is expected to be finalised shortly afterwards. The trading debut is scheduled for July 5.
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