Soho China launches $1 billion IPO with a difference

With a focus on a fast turnaround of commercial property projects, the Beijing developer offers investors a different kind of exposure.
Every time a new Mainland property developer seeks to list in Hong Kong, one of the key questions investors ask themselves is why they should buy the newcomer instead of one of the already listed players with an established track record.

Previously, the answer to that question may have been that the listing candidate had a different geographical focus, a different type of development, or a greater land bank, but as the number of listed players has grown, it has become harder and harder for newcomers to distinguish themselves. Not surprisingly therefore, cheaper valuations have become a key marketing tool when it comes to Mainland property IPOs.

But it is still possible to find new investment concepts as shown by Soho China, which started pre-marketing of its upcoming $1 billion initial public offering on Monday. The Beijing-based company focuses primarily on the development of commercial properties which it then sells in the form of strata units to other companies or high-net-worth individuals û for use, or as an investment. This is different to most of its peers in the market, which typically retain commercial developments as investment properties and rent out the office and retail space for recurring income. If they choose to sell, the entire office building is usually sold as one complete unit.

Soho ChinaÆs non-traditional approach makes it stand out and it will be the first among the Hong Kong-listed developers to offer this kind of exposure. One observer describes it as ôa leveraged play on BeijingÆs commercial property growth at a time when the capital is playing catch-up with Shanghai and eventually Hong Kong.ö

Because residential properties account for only 21% of its gross floor area (GFA), the company is also relatively immune to the ongoing government crackdowns to limit property speculation and curb soaring residential property prices. Office properties account for 53%, retail for 23% and hotel properties for the remaining 3%.

Meanwhile, properties for sale make up 67% of its gross assets, as of May this year.

The companyÆs business model is bound to attract a lot of attention among investors, but whether they decide they like and believe in it enough to also commit money in the IPO remains to be seen. The company and its three bookrunners - Goldman Sachs, HSBC and UBS - have yet to set a price range and while the business model will likely be a key consideration, the valuation is bound to be just as important û especially in light of the current market jitters.

Still, the different market focus should help Soho China stand its ground against fellow Beijing developer Sino-Ocean Land Holdings which is also seeking a Hong Kong listing at the moment. Sino-Ocean, which is larger in scale but more of a traditional residential property developer, is aiming to attract investors because of its focus on the Pan-Bohai Rim - an area that is expected to become China's next economic hot-spot. The developer is a little ahead of Soho China in the listing process and launched the formal roadshow for its offering on Monday with the aim of raising between $1.3 billion and $1.5 billion.

Early feedback from investors suggests that they are looking at both Soho China and Sino-Ocean and would be prepared to invest in both if their individual investment cases make sense.

Another indication that the companies themselves donÆt regard each other as competitors is the fact that Goldman Sachs is acting as a bookrunners for both these deals. On Sino-Ocean it is working alongside BOC International and Morgan Stanley. Typically, a listing candidate doesnÆt want an investment bank that is helping to take it public to work on an offering for a rival at the same time.

Also in the market at the moment is smaller residential developer Aoyuan, which is looking to raise $400 million with the help of Credit Suisse and Morgan Stanley. Guangzhou-based Aoyuan started pre-marketing last week and is expected to kick of its roadshow on September 18.

Several Hong Kong property tycoons have already given their nod to Soho ChinaÆs offering by committing to participate in the IPO as cornerstone investors and according to sources they may buy up to 30% of the offering, depending on the final price. The company is looking to sell 25% to 30% of its enlarged share capital through the IPO.

So far, seven cornerstones have signed up, namely the Kerry Group and its controlling owner Robert Kuok (as one entity), Wharf Holdings, Citic Pacific, Chinese Estates executive director Joseph Lau, a private equity unit of Standard Chartered, Bank of ChinaÆs private equity unit and the Government of Singapore Investment Corp.

Aside from these big-name supporters, the company also has its own well-known promoters in the form of its founding Chairman Pan Shiyi and his wife Marita Pan Zhang Xin, who is an executive director and CEO. The chairman is a frequent speaker at conferences in China, often features in Chinese and international media and is viewed as an integral part of the Soho China brand. In 2005 he was named as one of the 25 most influential business leaders in China by Fortune (China). He is also behind many of the companyÆs innovative ideas and while this is likely to be a positive during the IPO, it does also raise the question of where Soho China would be if he was no longer a part of it.

Another risk is the fact that most of its major developments are in Beijing. This is obviously deliberate as the company wants to focus on high-value districts in high-spending cities, and Beijing fits that bill. Because of its status as the capital, Beijing is also able to attract property investors from elsewhere in the country, observers say. However, the high geographical concentration still raises the question of what will happen if Beijing was to see a downturn in office rentals and property prices after the 2008 Olympics.

Syndicate analysts argue that the companyÆs focus on small and medium enterprises and high net worth individuals as its prime customers is a low risk strategy, however, as the demand from this group is strong and there is no real competition from other developers. Its targeted approach has also made the company something of a specialist on Beijing commercial properties, they say.

As of the end of March this year, Soho China had 1.2 million square metres of completed GFA and another 1.24 million sqm that it plans to complete in the next three years, including a high-profile site next to Tiananmen Square. According to a syndicate research report, the low competition for commercial land means the company should be able to buy many of the sites in Beijing that are currently under negotiation. These could total more than one million sqm of GFA and result in a more than 40% increase in Soho ChinaÆs current land bank.

Like for all other developers the key will be to see whether the company can continue to acquire attractive land at a regular pace, however. As the price of land has been heading higher in recent years, it may also be a challenge to continue doing so at attractive prices.

Among the strengths that the company will stress during its meetings with investors is its high asset turnover, which at an estimated 89% in 2007 is second only to Country Garden, and high margins. According to the same report the company achieved a gross margin of 53% in 2006, which is expected to decline to 38% this year and 40% in 2008. The analysts behind the report project the net profit will increase at a compound annual growth rate of 179% in 2006-2008.

ôWe consider SohoÆs fast churn and high-growth strategy to be superior in the current stage of ChinaÆs property market development, as we believe it is more important for developers to gain size and balance sheet quickly than than to amass slow-yielding assets, which tie up the bulk of capital,ö the analysts say.

The formal roadshow is scheduled to kick off on September 17.
¬ Haymarket Media Limited. All rights reserved.
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