Six Hong Kong IPOs set to price this week

The market will be watching the larger offerings from Excellence and Evergrande, which are seeking to raise up to $1 billion and $834 million respectively.

With six companies set to announce pricing for their Hong Kong initial public offerings over the next few days, this will be an important week for setting the course of the IPO market for the remainder of 2009. If the demand is sufficient enough for the deals to price high, it is likely to boost confidence among other issuers waiting in the wings and kick-off another wave of listings. However, should they price too high, it could trigger another round of weak trading debuts.

Anecdotal evidence suggests that investor appetite for IPOs has returned over the past week or so after a few weeks of poor aftermarket performance. Adding to the optimism, the Hang Seng Index closed at a new 12-month high last Friday ahead of the long weekend. However, it is likely to come under pressure today after a weak session on Wall Street overnight amid a strengthening dollar and falling oil prices.  

Four of the six companies due to price this week are Chinese property developers, including the two largest deals.  Both of these -- Excellence Real Estate Group and Evergrande Real Estate Group -- have attracted a lot of interest from investors, and Evergrande at least has been telling the market that the deal was oversubscribed on day one. Excellence is seeking to raise up to HK$7.8 billion ($1 billion), while Evergrande, after an adjustment to the number of shares on offer last week, is looking to raise up to HK$6.46 billion ($834 million).   

Evergrande is now selling 1.61 billion shares, slightly more than the 1.5 billion it initially indicated. The reason for the increase has to do with the fact that at the original issue size the company would have failed to meet a stock exchange requirement that its top three public shareholders cannot hold more than 50% of the freefloat. By increasing the number of new shares it has rectified that situation. At the low end of the price range, the public float will now be 22.9%, while the top three holders - Temasek, Global Investment House of Kuwait and Cavedish - will have a combined 11.4% stake. As the price range remains unchanged, the maximum potential proceeds have increased to $834 million from $780 million.

The two developers have taken a different approach in terms of marketing their deals. Evergrande, which focuses on residential developments in second- and third-tier cities across China, has chosen to offer its shares at a deeper discount to its net asset value (NAV) and a lower price-to-earnings multiple than most of the property developers currently seeking to list in Hong Kong. The discount of 41.2% to 55.9% versus the predicted 2010 net asset value and a 2010 P/E ratio of 4.7 to 6.3 times (both on a pre-money basis) even prompted Evergrande's chairman, Hui Ka-yan, to tell reporters at a press conference last week that he was "heartbroken" by the low offering price, since he "knows" that the company is worth more than that.

True or not, Evergrande is carrying a lot of debt, and while some of its most expensive pre-IPO funding has been restructured, this is still something that investors will have to get comfortable with. A generous valuation -- even at the top-end of the range Evergrande will only be on par with Powerlong Real Estate Holdings, which priced its offering 17% below the indicated range a couple of weeks ago -- should work as an incentive in that respect. At the same time, the company and its bookrunners -- Bank of America Merrill Lynch, BOC International, Credit Suisse and Goldman Sachs -- would want to make sure that the IPO is successful this time. It first attempted to list in March 2008, but was forced to call it off due to insufficient demand. The delay -- in combination with the financial crisis -- left the company with limited access to fresh funding, which has hampered its development over the past 18 months. It is therefore crucial that there are no further delays.

Excellence on the other hand, has chosen to focus the marketing on the fact that it gets a majority of its earnings from commercial properties -- a relative rarity among the Chinese property companies listed in Hong Kong. The company is the leading developer of office property in the Shenzhen special economic zone, just across the border from Hong Kong, and is in the process of trying to replicate that success in other markets as well. A key selling point is its low land costs, achieved thanks to its participation in urban renewal projects, which, according to analysts, will result in higher net margins than most residential developers in the next three years.

Counting on the fact that investors will be keen to buy something other than just another residential developer, Excellence has been less generous in terms of valuations. The company, which is being brought to market by ICBC International, Morgan Stanley and UBS, is offering its shares at a 28.9% to 40.6% discount to its 2010 NAV and at a P/E multiple of 7.5 to 9.3 for that same year.

On a P/E basis this is not only above Evergrande's proposed valuation, but also exceeds the current valuation of Beijing-based Soho China, which is viewed as a key comparable because of its near exclusive focus on commercial properties. Like Soho China, Excellence also sells its office units and retail space to investors on a strata basis. However, it is coming at a discount to KWG Property Holdings, which has a high exposure to both commercial and residential properties in Guangzhou's business district. KWG is trading at 12-13 times its projected earnings for 2010.

Justifying the higher valuation, say bankers and analysts, is a net earnings growth of more than 200% in both 2009 and 2010, a sharp drop in gearing levels following the injection of new equity capital and the potential addition of 10 new project sites, which could add 27% to its current landbank of 11.5 million square metres. Excellence has entered into agreements to acquire the land, but is still negotiating the land use rights.

Excellence, which is due to price its IPO after the US close today, is offering 3 billion new shares, or about 25% of its issued share capital, at a price between HK$2.10 and HK$2.60 apiece. It has already earmarked $50 million of the deal for two cornerstone investors, with Ping An of China Asset Management (Hong Kong) and China Life Insurance (Overseas) company agreeing to buy $20 million and $30 million worth of shares with a six-month lockup.

Also set to price today is Mingfa Group (International), another property developer, and Trinity Limited, a small-cap retailer of high-end and luxury menswear in Greater China that is controlled by the brothers behind Hong Kong-listed supply-chain manager and sourcing agent Li & Fung. Mingfa, which focuses on mixed-use commercial properties and integrated residential properties in the Fujian and Jiangsu provinces, is seeking to raise up to HK$3.41 billion ($440 million). This is the only one of the property developers currently in the market that is being offered at a wider discount to the estimated 2010 NAV than Evergrande - at the bottom of the range, the discount is a wide as 60%. Bank of America Merrill Lynch, Bocom International and Deutsche Bank are joint bookrunners.

Trinity is hoping to raise between $76 million and $100 million and has already secured Temasek as a cornerstone investor, buying $15 million worth of shares. Citi and J.P. Morgan are the joint bookrunners.

Meanwhile, Yuzhou Properties is expected to announce its IPO price today, after wrapping up the offering on Friday last week. The company is the largest residential developer in the city of Xiamen, also in the Fujian province, with a 10% market share and also has a small sideline in commercial property. It has been seeking to raise up to $286 million from the sale of 600 million shares at a price between HK$2.70 and HK$3.70. Morgan Stanley is the sole bookrunner.

Evergrande is scheduled to price its IPO on Thursday, on the same day as a smaller offering from Greens Holdings. Greens, which makes heat transfer products that are designed to enhance energy efficiency, is hoping to raise up to $91 million. Again, Morgan Stanley is the sole bookrunner.

Another small-cap company, Comtec Solar Systems Group, fixed the price of its Hong Kong IPO over the long weekend at the bottom of the offering range at HK$2.10, according to sources. However, at a total deal size of HK$525 million ($68 million), the offering is too small to draw any conclusions from the low-end pricing about the other deals currently in the market.

There was no immediate information about the level of demand, although the deal was said to have attracted some global funds specialising in clean energy. Having transformed itself from a manufacturer of semiconductor wafers since 2004, Comtec now makes monocrystalline ingots and wafers for use in the manufacturing of solar cells. It had an annual wafer production capacity of 55 megawatts at the end of 2008, which is scheduled to increase to 200MW at the end of this year, and 504MW by the end of 2010.

Comtec is being brought to market by ICBC International and Macquarie. 

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