Shui On Land returns with sharply reduced IPO offer

Price range is at the low end of that used for postponed June offering. China Blue Chemical sets its price range in line with Mainland peers.
Mainland developer Shui On Land will start premarketing today to revive its Hong Kong initial public offering. The IPO was called off in mid-June amid difficult market conditions that made investors extremely sensitive about valuations.

Both the secondary and the primary markets has recovered since then and China Merchants Bank, which is currently on the road trying to raise up to $2.66 billion, is receiving overwhelming demand, according to bankers close to the offering. China Blue Chemical, the fertiliser unit of China National Offshore Oil Corp, has also received enough orders to cover its entire $340 million offering even though the formal bookbuilding process doesnÆt kick off until today (September 11).

To ensure a smooth relaunch, the size of Shui OnÆs IPO will be significantly reduced compared with its earlier listing attempt - which targeted between $760 million and $989 million. This time the offer will be approximately $550 million to $650 million, sources say.

Like in June, the IPO is jointly arranged by Deutsche Bank, HSBC and JPMorgan

The reduction in size will be achieved both by cutting back on the number of shares on offer to about 20% of the company from 25% last time, and by lowering the offering price.

ôThe market has improved, but now is also the right time for the company to get a proper funding structure in place in order to be able to take advantage of the opportunities that may come in its way,ö one observer says of the decision to return only two months after the previous attempt.

By going on the road now, Shui On will also avoid clashing with Industrial and Commercial Bank of China (ICBC) which is on track to start marketing its massive dual listed IPO in October. That deal is expected to raise between $16 billion and $19 billion from the H share portion alone, depending on which source one listens to, and is likely to absorb huge amounts of market liquidity.

According to one source, Shui OnÆs new price range will be narrower than last time when the bookrunners opted to keep it wide to retain the maximum amount of flexibility - given the choppy markets. Based on early feedback from potential investors, the range is likely to be set at the lower end of the HK$5.60 to HK$7.55 span where it was offered in June, he says.

The formal roadshow will begin next Monday, with the pricing scheduled for September 26. The listing is currently planned for around October 4.

A price range corresponding to the lower half of the previous offering range would value the developer at about 13.7 to 15.8 times its 2006 earnings, based on average syndicate projections. This compares with an average 2006 PE of 16 times and a 2007 multiple of 11 for its key Hong Kong-listed peers, including regional developers such as Guangzhou R&F Properties, Hopson and Agile Property Holdings, and Shanghai-focused Shanghai Forte Land. Shimao Properties, which fits into both categories, is also widely looked at as a comparable.

Because of its large land bank and long-dated development profile, investors tend to look at Shui On on a discount to net asset value basis rather than on a PE basis, however. Last time it was offered at a wide 13%-30%, but if it is kept in the lower half this time it would be in line with the comps, which currently trade on an average 15%-20%.

Observers say direct comparisons are difficult, however, because Shui On is quite a unique developer in that it tends to work with local governments to redevelop entire city sections into modern communities. Its ongoing projects have a development horizon that stretches out to 2014.

Back in June, the discounts of its peers were significantly higher as Mainland property developers were among the worst hit stocks in the May correction amid concerns that more austerity measures would be put in place to limit speculative buying of physical property.

China Overseas Land fell 14% during Shui OnÆs two-week roadshow which started on June 5. Guangzhou R&F Properties was down 19% and Agile Properties dropped 22% in the same period, while the Hang Seng Index (following a modest rebound from the lows) was down 4.2%.

Shui OnÆs Chairman and CEO, Vincent Lo, took the decision to call off the IPO on June 14 û one day before the order books were due to close - saying that ôto proceed at this time would not be in the best interest of the company.ö

People familiar with the deal said at the time that the offer was fully covered within the price range, but Lo had decided to postpone because he worried about a weak aftermarket.

Perhaps he worried unnecessarily though as the Hang Seng Index has risen 12.5% since mid-June, while Guangzhou R&F has rallied 25% and Agile has surged 44%. Shimao has gained 36% since its trading debut on July 5.

The company, which is part of Hong Kong property tycoon LoÆs Shui On Group, has built a name for itself in recent years primarily through its landmark Xintiandi development in Shanghai and is currently working on six large-scale urban projects that aim to redevelop and modernise run-down areas in four cities.

To ensure the IPO wasnÆt held up for too long, the company has updated its financial accounts to include earnings for the first quarter only instead of for the entire first half as many other companies that fail to meet the June 30 deadline tend to do. The new numbers werenÆt available last night, but because the revenue for Mainland developers tend to be lumpy (especially following a rule change that requires developers to book revenue at completion rather than at the time of the pre-sale) they may not say that much about the full-year bottom line, anyway.

The split between new and old shares may change somewhat compared with the 70-30 division last time as the developer will first determine how much primary capital it needs (given that the total size is now much smaller) and then make up the rest of the total offering size with secondary shares from various vendors. Discussions between the company, the vendors and the three bookrunners are still said to be ongoing.

Meanwhile, China Blue Chemical has set the price range for its IPO at HK$1.38 to HK$1.90 per share, according to separate sources. With a base offer of 1.4 billion new shares, or 32% of the company, that will result in a total deal size of $248 million to $342 million. If the 15% greenshoe is used in full, the proceeds will rise to $394 million.

JPMorgan and UBS are leading that offer.

The price range values the producer of urea fertiliser and methanol at between 7 and 9.7 times the companyÆs 2006 earnings projection, which pitches it in line with Mainland comparables that trade at an average 2006 PE of 9 times. China Blue is forecasting a full-year profit of Rmb880 million, which represents 7.3% growth over last yearÆs recurrent net earnings of Rmb820 million.

Canada-based Agrium, which aside from nitrogen fertilisers (such as urea) also makes agricultural nutrients based on phosphate and potash and has a retail operation that markets seed and crop protection products, trades at a forward PE of about 17 times. Norwegian fertiliser producer Yara International, which has agreed to buy 10% of China BlueÆs IPO, is currently quoted at 9 times this yearÆs projected earnings.

China Blue, which is planning to list in Hong Kong on September 29, has also set aside about $80 million, or just over 20% of the offering based on the top end of the price range, for four corporate investors. According to a source familiar with the deal shares will be bought by Henderson Land Chairman Lee Shau Kee, Chinese Estates, the investment arm of Bank of China group and a unit of Cinda Asset Management called Hua Jian.

According to sources, the CNOOC name is helping to attract investors even as people worry about the current rise in the price of natural gas, which is the key raw material for making urea fertiliser.

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