Sunac raises $336 million from relaunched IPO

The Chinese property developer relies on cheap valuations and cornerstones as it returns to the market 10 months after its previous listing attempt.

Consumer retail, mining and renewable energy have been three key themes in the Hong Kong IPO market over the past month and some investors have also started to look ahead to AIA Group’s $15 billion offering which kicks off bookbuilding today. But alongside those high-profile deals, investors are also pumping money into several lesser known stocks, which may not reach spectacular subscription levels, but are still achieving their goals of going public and as such are the real testament to the depth of the Hong Kong market.

One of these companies is Sunac China Holdings, a Tianjin-based residential property developer, which has tried to list no fewer than three times -- although the first couple of times it was under a different ownership. The latest attempt to go public was in December last year, but being the 12th Chinese property company to seek a listing in Hong Kong since the beginning of September 2009, the company failed to drum up much enthusiasm and the offering was cancelled shortly before pricing. It returned to the market earlier this month and late last week it became the first Chinese property company to complete an initial public offering in Hong Kong since February.

The company raised $2.61 billion ($336 million) after fixing the price just below the mid-point of the range. The institutional tranche was multiple times covered up to the mid-point of the price range by a mixture of long-only funds, including some property specialists, hedge funds, private wealth money and even one sovereign wealth fund.

Sources said they were somewhat surprised at how broad the institutional interest was, but noted that US and European investors are starting to see value in the China property sector after a tough year when share prices have been weighed down by expectations of more government measures to curb excessive property price increases. Supposedly some investors were also using the IPO as something of an arbitrage trade, selling some of their existing property exposures and buying the newcomer to take advantage of the low IPO valuation.

The bulk of the deal, or about 60%, still went to Asia, but US investors bought some 25% while the remaining 15% went to Europe.

The 10% retail tranche was about four times covered, which is sufficient, but not enough to trigger a clawback. For that to have happened, the retail tranche would have had to be at least 15 times covered.

A key reason why investors were attracted to the deal this time – aside from the lack of competition from other Chinese property players – was that the deal came cheap. But bankers argue that, with so many deals in the market, an attractive price range is necessary in order to grab investors’ attention and to make them spend time doing the necessary work.

The IPO price values Sunac at 3.6 times its 2011 earnings or at a 58% discount to its estimated net asset value, which is lower than the valuation offered in December and, in terms of the discount to NAV, well wider than the sector average of about 35%.

A couple of months before the relaunch, Sunac hired Goldman Sachs as a bookrunner to replace UBS. Deutsche Bank, which arranged the December offering together with UBS, is a pre-IPO investor in the company so was kept on.

To ensure the deal was successful, the bookrunners signed up three cornerstone investors which agreed to buy a combined $65 million worth of shares, or 19% of the deal, as well as a number of anchor investors. And the strategy worked as the deal was fully covered on day one which gave other investors the confidence to submit orders as well.

Sunac focuses on mid- to high-end residential projects in tier-1 cities like Beijing, Tianjin, and Chongqing – the kind of projects that continue to draw cash-rich buyers even as the government is clamping down on speculation. It is also active in Wuxi and Suzhou. Its buildings tend to be large and typically include a commercial element such as retail podiums.

The company sold 750 million new shares and may sell a further 112.5 million if the 15% overallotment option is exercised in full. The price was fixed at HK$3.48 after being offered in a range between HK$3.18 and HK$3.98.

The stock is due to start trading on Thursday (October 7).

¬ Haymarket Media Limited. All rights reserved.
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