Sunac offers IPO at record low valuation as Kaisa prices at bottom

Fatigue for property stocks appears to spread as Sunac offers its shares at less than five times next year's earnings at the bottom of the range, and Kaisa's IPO is only about three times covered.

Sunac China Holdings has set a price range for its initial public offering that values the Tianjin-based developer below the other property companies that have listed in Hong Kong over the past couple of months. Based on a price per share between HK$2.90 and HK$3.70, the company is valued at 4.7 to 5.9 times its projected earnings for next year, according to a source -- well below the 10.4 times that Glorious Property Holdings achieved as the first-mover among the 10 property developers that have come to market since mid-September.

With a couple of exceptions, valuations have been trending lower since then but at the bottom of the range Sunac is looking cheap even against the lowest valued among them -- Fantasia, which priced at a 2010 price-to-earnings multiple of 6.5, and Evergrande Real Estate, which fetched a 2010 P/E multiple of 5.5 times. Sunac is seeking to raise up to HK$2.22 billion ($286 million).

But perhaps this is what is needed now. There have been plenty of signs that investors are getting a bit fatigued with the deluge of property stock that the market has had to absorb recently, including muted interest in the IPOs themselves and poor aftermarket performance. Fantasia, which was the latest one to debut on November 23, fell 8.7% during the first three days of trading but has since been edging higher and yesterday closed 4 HK cents above its IPO price, at HK$2.22.

Pointing to the same thing, sources said Kaisa Group Holdings received modest interest for its IPO and faced with a price sensitive order book the Shenzhen-based developer yesterday priced the deal at the bottom of the offering range. At a final price of HK$3.45, Kaisa raised HK$3.45 billion ($445 million) and is valued at 6 times next year's earnings.

The 90% institutional tranche was said have been a bit more than two times covered, while the 10% retail tranche was close to three times subscribed. However, the good thing, according to a source, was that there was no "fluff" in the book, i.e. the orders weren't inflated by investors expecting to get scaled back and also there were no momentum orders from short-term players looking to sell out shortly after listing to cash in a quick profit.

In fact, the source said, the quality of the order book was pretty good. Demand was said to have been particularly strong from Asia-focused funds based in the UK, and the deal also attracted some quasi-property specialist from the US. All in all, some 40 investors submitted orders. The deal was supported by four cornerstone investors buying a combined $60 million worth of shares, or 13.5% of the final deal size. Cheng Yu-tung's Chow Tai Fook and Choi Chee Ming are each taking $20 million worth, while Joseph Lau from Chinese Estates and Yeung Ching Loong are each investing $10 million.

Kaisa is also backed by a number of pre-IPO shareholders, including Carlyle and Temask, which will not be selling any shares in the IPO.

The company is being brought to market by BOC International and Credit Suisse and is due to start trading on December 9.

Meanwhile, Sunac is offering 600 million shares plus a 15% overallotment option. The company has an established track record in terms of consistently buying land on the cheap and benefitting from asset appreciation. This is leading to wider-than-average margins, which should be attractive. That said, the company is focusing on much the same type of developments as many of the other property company that are already listed in Hong Kong, namely mid- to high-end residential projects in tier-1 cities like Beijing, Tianjin, and Chongqing. The company is also active in Wuxi and Suzhou. Its buildings tend to be large and typically include a commercial element such as retail podiums. 

Sunac has about 3 million square metres of competed developments and another 2 million sqm under construction. It also holds a landbank of about 6 million sqm for future developments. Pre-IPO investors in the company include Deutsche Bank, Bain Capital, alternative asset manager CDH and a company called Lead Hill.

The company kicked off its institutional roadshow in Hong Kong yesterday and will launch the Hong Kong public offering next Monday (December 7). The deal is scheduled the price on December 11 (Hong Kong time) and the trading debut is set for December 18.

Deutsche Bank and UBS are the joint bookrunners.

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