Soho China and Aoyuan raise maximum from IPOs

Soho China attracts $100 billion of institutional demand as Sino-Ocean surges 43% on debut and the Hang Seng Index climbs to a new record.
In a week that saw the Hang Seng Index gain 5% and push above 27,000 points for the first time ever without so much as a glance in the rear-view mirror, it was no surprise that another two property developers were able to price their Hong Kong IPOs at the top.

The larger of the two, commercial real estate developer Soho China, set its price at HK$8.30 for a total deal size of HK$12.87 billion ($1.65 billion), while Guangdong-based residential developer China Aoyuan Property Group raised HK$3.64 billion ($467 million) after confirming the price at HK$5.20 per share.

Given the strong demand for stock, neither company is likely to have even considered a lower pricing. And why would they when investors seem just as keen to buy the shares in the secondary market - as indicated by the 43% surge in Sino-Ocean Land HoldingsÆ share price in its first day of trading Friday. Sino-Ocean too had fixed its IPO price at the top the offering range.

Soho ChinaÆs offering was clearly the more popular of the two, with sources saying institutional investors alone submitted orders worth more than $100 billion. A developer of commercial properties that it then sells in the form of strata units, the Beijing-based company offered a unique kind of exposure amid the myriad of residential developers that have listed in Hong Kong in recent years.

The deal was arranged by Goldman Sachs, HSBC and UBS.

Retail investors were said to have subscribed to 169 times the amount of shares initially earmarked for them, tying up about HK$217.4 billion ($28 billion) of cash and triggering a full clawback. The latter will result in the retail tranche being automatically increased to 50% of the total deal from 10% at the outset. After adjusting for this and the 18% of the deal that went to seven cornerstone investors, the remaining institutional tranche of $528 million was about 193 times covered, according to one source.

More than 600 institutional investors submitted orders. About 50% of the demand was generated out of Asia, while Europe and the US split about 42% between them. The remaining 8% came from the Middle East.

Aoyuan attracted fewer orders in absolute terms, but in relation to the size of its offering, this deal too was heavily oversubscribed. One source says the retail tranche was about 200 times covered, again triggering the maximum clawback and ensuring that half the deal went to retail investors. The institutional tranche was at least 220 times covered post clawback and after adjusting for the 19% that went to five cornerstone investors, meaning the deal attracted about $31.8 billion of institutional demand.

Credit Suisse and Morgan Stanley were the joint bookrunners.

Observers say investors liked the company because of its cheaper valuation versus Soho China and Sino-Ocean, but also because of the managementÆs low-cost acquisition strategy and the high margins. They were also excited about a framework agreement that the company has entered into with the Shenyang municipal government regarding the possible acquisition of a site in ShenyangÆs Dangling district.

While there are still no guarantees that the acquisition of the site, which has a gross floor area of 1.25 million square metres, will go through, syndicate analysts noted that it has the potential to become a key driver of profit and net asset value over the next 10-12 years.

Aoyuan sold 700 million new shares, or 31% of the company, and may sell an additional 105 million shares if the greenshoe is fully exercised. That could boost the total proceeds to as much as $537 million. The shares were offered in a range between HK$4.10 and HK$5.20. The IPO price values the developer at a 4.4% discount to its pre-shoe net asset value and at nine times its 2008 earnings. This compares with an 11% premium to NAV and a 2008 P/E multiple of 11 times for its closest peers, which include Beijing Capital Land, Shanghai Forte, Yanlord Land, KWG Property, Hong Long Holdings and SPG Land.

Soho China was priced at a 1% premium to NAV and a pre-shoe 2008 P/E multiple of 15.3 times, which puts it in line with Sino-OceanÆs 2.2% premium to NAV (based on the blended syndicate forecasts) and 16.1 times it 2008 earnings just a week earlier. However, after the strong trading debut Sino-OceanÆs valuation has gone through the roof and Soho China now looks cheap in comparison.

Soho China sold 1.55 billion shares, of which 1.25 billion were new. The rest were existing shares sold by the controlling shareholder and a group of minority shareholders. The shares were offered in a range between HK$6.30 and HK$8.30. If the greenshoe is exercised in full the deal size will increase to $1.9 billion.
¬ Haymarket Media Limited. All rights reserved.
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