Like Shui On Land, which returned with its earlier postponed share sale on Monday, SPG is based in Shanghai but is looking to expand its operations beyond the one city. Both companies are also involved in large-scale projects that take years to complete, but thatÆs pretty much where the comparisons end.
While Shui On Land engages is local-government sponsored urban renewal projects aimed at modernising run-down city sections and sits on a sizeable landbank, SPG is an asset-light developer focusing primarily on residential properties for the mid- to upper-class segment of the market. A large portion of its existing project schedule is villas and town houses.
SPG has struggled with negative cashflows and net current liabilities in recent years. So in an effort to generate long-term recurrent income, it has diversified into hotel operations, including a 50-50 joint venture with Hong Kong & Shanghai Hotels to build The Peninsula Shanghai. Construction work on this hotel is expected to begin within the next couple of months and the doors are expected to open by 2009.
SPG is also developing a second hotel at its Cambridge Forest Newtown project which is next to the proposed site for a future Disneyland in Shanghai. The four-star hotel is expected to be operated by the InterContinental group. SPG also intends to include a five-star Crowne Plaza Hotel at its Huangshan resort, which will include some 250 rooms as well as resort villas.
Still, some fund managers say they are at pains to find a significant edge that differentiates SPG from other Hong Kong-listed Chinese property plays, given the range of alternatives available. However, the decision by joint bookrunners DBS Asia Capital and Macquarie Securities to set the price range to allow for a wider discount to NAV than most of its peers, could well prove to be that one defining factor.
Based on the current price range of HK$4.28 to HK$4.90, the stock is offered at a 30%-38% discount to its estimated post-money net asset value, which compares with an average 20%-25% for most of its key comparables, analysts say. The companies looked at by most analysts include China-based plays like Shimao Property Holdings, Shanghai Forte Land and China Overseas Land, as well as regional developers like Agile Property and China Greentown.
Shui On is being marketed at a slightly narrower range of 30% to 35%, while Shimao Property Holdings, which came to market at the tail end of the sharp correction in global equity markets in May and June, was sold at a 45.6% discount. Since then, the sentiment for Mainland developers have improved significantly and ShimaoÆs discount has narrowed to below 30% after a 36% surge in the share price.
According to sources who attended the roadshow kickoff in Hong Kong on Tuesday, SPGÆs IPO is already covered partly thanks to the inclusion of four anchor investors who have committed to take up a non-disclosed portion of the deal. One of the investors is believed to be a well-known company in the hotel business.
The confidence of the bookrunners is also evident in the fact that they ran only one week of pre-marketing, compared with the usual two, before starting the bookbuild yesterday. From here on, the IPO process will follow the normal timetable with the 3.5-day retail offering starting on September 26 and the price expected to be fixed over the National Day weekend (October 1-2).
The trading debut on Hong KongÆs main board is scheduled for October 10.
SPG is offering 250 million new shares, or 25% of the company, plus a 15% greenshoe that could boost the final deal size to HK$1.4 billion ($181 million). It has the usual split of 90:10 for institutional and retail investors, barring a potential clawback triggered by strong retail demand.
About 60% of the proceeds will go towards the financing of future acquisitions of land or companies holding land. About 83% of that will be allocated to land outside of Shanghai, as outlined in the preliminary listing document. According to one source, the focus is on second-tier cities and the company has already identified a few potential targets, although it is being tight-lipped about what they might be.
About 15% of the money raised will be used to pay for future and ongoing property developments, while the remaining 10% will be used for working capital. Following the IPO, the companyÆs debt-to-equity ratio is expected to drop to about 20% from more than 120%
One fund manager questioned the companyÆs land acquisition strategy, noting that the company has bought very little new land in the past two years and appeared vague about its intentions.
ôThe discount to NAV seems reasonable, but the NAV itself will depend on acquisitions and SPG seems to have no target that matches those of the competition,ö the fund manager says.
Observers acknowledge that SPG has only made one acquisition in recent years, taking a 30% interest in a company that holds a piece of land in Shanghai that will be developed into the International Huangpu Office Building. But they say that this is in line with the company's strategy of not holding a lot of empty land.
ôThe company prefers to get land whenever it needs it and because its projects arenÆt located in the city centres, but rather 30-40 minutes away, there is no need for it to accumulate land before it is ready to develop it. China is big and there is a lot of land to be had," says one observer. In addition, it takes the company several years to finish a project.
The companyÆs first project, the residential Cambridge Newtown which includes villas, apartments and shops was started seven years ago and is now in its sixth phase. SPG also has two other projects at different phases of construction and another three that are about to be developed, including plans for a resort development in Huangshan that is expected to open for commercial use in 2009. Together these six projects have a combined gross floor area of 2.42 million square meters.
Another observer argues that the lack of an excessive land bank gives SPG a ôcleaner and more simple structureö which together with the experienced management is viewed as an advantage by many potential investors. And on top of that, it has the hotel development, which is seen as a ôreal bonusö.
In the past two years, the company has generated sales of Rmb748.6 million and Rmb1.17 billion ($147 million) respectively and in the first half of this year it posted a top line of Rmb1.15 billion. Net profit increased by 154% to Rmb261.5 million in 2005, while in the first six months this year it raised Rmb232.1 million ($29 million).
According to the preliminary listing document, the company forecasts a net profit of no less than Rmb360 million this year, which would be the equivalent of HK$0.353 per share. It intends to pay about 30% of that as dividends, although it is making no commitments.
The company is currently virtually 100%-controlled by founding Chairman Wang Weixian through his Australia-incorporated holding company Starwaly Properties (Group) and a series of other holding companies on behalf of him, his family and the group managing director.
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