Soho drops New York listing

The property company drops ambition to be first listed Chinese property company in New York.

High profile, trendy Beijing property company, Soho has this week decided to hold an analysts meeting to discuss the potential of launching its IPO, which was first mooted in November. However, the company now plans to list only in Hong Kong, having dropped its grand ambition to be the first Chinese property company to list in New York.

It is thought the decision to drop a US listing has been taken, in part, because of added complications created for foreign issuers as a result of the new Sarbanes-Oxley Act that emerge after the Enron scandal.

However, there is also a pragmatic realization by co-CEOs and founders, Pan Shiyi and Zhang Xin that US investors who want to own the stock are able to do so through a Hong Kong listing, and that having two listings could actually damage liquidity by fragmenting demand.

The deal looks set to happen some time in the first quarter and is now likely to be between $100-$200 million. Goldman Sachs is lead manager, with Morgan Stanley brought in as a co-lead along with ABN AMRO.

The husband and wife team, Pan Shiyi and Zhang Xin set up Soho in 1997, and have become household names in China for revolutionizing the private apartment market. With a flair for marketing and an eye for cool design, they have created apartments that have wide appeal for China new 35-45 year old middle class.

However, when the deal was premarketed in November, the deal suffered from negative sentiment after China Telecom's majestic bellyflop. Moreover, it quickly became clear that some equity analysts had some concerns about the company. ING, in particular, had issues with the company's lack of a landbank and withdrew from the syndicate.

Complicating matters further was the news that HSBC was to launch an IPO for Beijing Capital, a property developer affiliated to the Beijing municipal government.

Inevitably the two companies were quickly compared and Hong Kong-based property analysts found Beijing Capital much easier to understand.

Soho is an asset-light developer, which uses its branding and marketing savvy to pre-sell its apartment complexes. Its image as an upmarket, chic developer was further enhanced when it built a boutique hotel by the Great Wall which has won international architectural awards.

However, Soho is not easily compared with Hong Kong or Singapore property developers because it does not have a large land bank. This worried some analysts.

Beijing Capital, on the other hand, fits more readily into analyst's existing models. It has 3.4 million square metres of land that it can use to develop.

Soho's Zhang Xin told FinanceAsia in an interview last year that there were significant differences between the Hong Kong and Beijing property market, however. In Hong Kong, the finite quality of the island, makes a landbank essential. In Beijing, however, shortage of space is not a problem.

She noted that the key to success in the Beijing property market was possessing the requisite marketing skills and track record to pre-sell whole complexes and use the funds to build the project.

A land bank is something of a misnomer in Beijing because if a developer does not build on a property within two years, the property automatically reverts to the authorities where it can be auctioned off again.

Given the need that all Beijing developers have to pre-sell before they build, this means that while a lot of property has been allocated to developers in Beijing, it is by no means certain it will all be built. Medium-term success will be based more on who can pre-sell best rather than on the size of the land bank.

Soho portrays itself as a highly entrepreneurial company that symbolizes the new China. Pan Shiyi has been developing property for close to 10 years, while Zhang Xin is a Cambridge graduate and has worked for Goldman Sachs and Travelers. In 1999, when they completed their first apartment block, they were highly successful at intermediating between the state banks and those who wanted to buy the apartments. So successful were they at securing mortgages for their customers that Zhang Xin says Soho apartments made up 25% of all mortgages given in Beijing as a whole in 1999.

Those who bought the first set of Soho properties have seen apartments rise 50% in value and if they have rented them, have achieved healthy 15% rental yields. Their architectural design - merging old style courtyards with modern living - have had heavy appeal. Their decision to part-furnish the apartments was also a winning strategy, and led to added value through their own unique style.

Adding to the image of cosmopolitan professionalism, the company also has two prominent independent directors - Simon Murray, the former head of Hutchison, and Bob Lessin, an ex-Morgan Stanley banker. Both Zhang Xin and Pan Shiyi have committed not to sell any stock for two years after the IPO.

The latter point is important since investors know that both are vital to the company's success. Indeed, how they perform in the forthcoming roadshow will be a critical factor in the deal's performance.

The roadshow should throw up some tough questions. There will be concern about copycats stealing Soho's unique niche; and there will be inevitable questions about the landbank issue.

How to value the company will be a definite problem. It is thought investors will triangulate between the valuations of listed Chinese property companies, Hong Kong property stocks and small cap growth stocks. These respectively trade at 7.6 times forecast 2003 earnings, 13 times and 15 times.

Previous speculation that Soho would try and list at 50 times earnings looks unfounded, and it is thought that Zhang Xin and Pan Shiyi are both willing to let the valuation be decided by the market.

It also thought that Soho will pay a dividend yield of around 2-3%.

In their roadshow, the story they will sell is their above average profit margins, their ability to market and pre-sell and also to improve each new project so as to to stay ahead of the mimicking competition.

The bottom line may prove to be investors overall sentiment on China, as the Beijing property market is a reasonable proxy for the growth of China's economy as a whole. Forecasts on China's growth this year from CSFB, put Chinese economic growth in 2003 at close to 8.3%, while property consultant, DTZ Debenham Tie Leung says Beijing residential demand surged 58% last year to 17.8 million square metres.

Moreover, the property consultant adds it sees no sign of a bubble in the Chinese capital city, with new apartment supply in the same period amounting to 17.9 million square metres.

Ultimately, Soho's success may come down to its explanation of the mechanics of the Beijing property market, and investors overall view on the expected growth in the city in the run up to the 2008 Olympics.