Shares in SouFun Holdings, the operator of China’s largest real estate searching website, closed at $73.50 in their New York Stock Exchange (NYSE) trading debut last Friday, 72.9% above the initial public offering price of $42.50. The company raised $125 million by selling shares at the top end of an indicated range in the US IPO.
SouFun is the first of several Chinese companies looking to sell shares in the US primary markets this month and the good response is also likely to encourage companies with similar businesses to float shares.
The Beijing-based company has strong prospects. SouFun, which literally means “searching house” in Mandarin, runs a dazzling website that contains a variety of real estate information from all over China -- from luxury apartments in prime areas of Beijing selling at Rmb100,000 ($14,705) per square metre, to plain flats in Guangdong’s manufacturing areas that can be rented at Rmb300 ($44) per month. It also provides users with property market forecasts and feng shui predications of new apartments.
According to China Internet Network Information Center, the number of internet users in China grew to 384 million in 2009 and increased further to 420 million in the first half of this year. That is more than six times of the entire population of the United Kingdom. And the number is expected to continue to grow following the country's urbanisation.
Moreover, the online advertising market in China is estimated to reach Rmb30.9 billion this year and Rmb58.5 billion in 2012, compared with Rmb2.3 billion in 2004, data from consulting firm iResearch, show.
The growth prospects helped SouFun to price its IPO at the top end of an indicated price range between $40.50 and $42.50. At the midpoint price, SouFun was valued at 14.3 times earnings, according to Bloomberg.
That is a significant discount compared with Hong Kong-listed Tencent, China’s biggest internet company by market value, which is currently quoted at a price-to-earnings multiple of 30 times based on this year’s estimated earnings.
SouFun sold 2.933 million ADSs (American depositary shares) which each represent four ordinary shares. The offering consisted of 8.4% primary shares and 91.6% secondary shares. Some 1.826 million of the secondary ADSs were sold by Australia's Telstra International, which is an existing shareholder of SouFun.
The deal was arranged by Deutsche Bank and Goldman Sachs.
SouFun plans to use the net proceeds of approximately $7 million from the sale of primary shares for capital expenditure relating to the expansion of business operations.
SouFun generates 80% of its profits from charging fees from property developers, real estate agents, brokers and property owners that list and promote their properties on its website. Most Chinese property developers promote their new projects on SouFun's website -- a business that contributes a large proportion of its revenue. It also earns money from advertising by furniture and home renovation companies on the website.
The company had a 46.3% market share of the online real estate advertising market in China in 2009, by estimated revenues. It provides marketing, listing and other value-added services and products for China’s fast-growing real estate and home furnishing and improvement sectors, SouFun said in a filing with the US Securities and Exchange Commission.
It had revenue of $127 million in 2009, and $68 million in the first half of this year. However, the Chinese government's tightening measures targeted at the over-heated property market do affect SouFun's earnings. Policies such as restrictions on the provision of loans for buyers of their third or subsequent home, an increase of the minimum down-payment amount and higher lending rates for purchasers of second homes, are squeezing property developers' sales and will in turn erode SouFun's revenues from advertising services.