Sunac scraps IPO, while Shengli Oil & Gas raises $204 million

The property developer blames market conditions for the withdrawal of its IPO, which had been due to price last Friday.

Yet another Chinese developer has chosen to cancel its initial public offering, providing further proof that investors are getting choosy. Sunac China Holdings, which was aiming to raise up to HK$2.22 billion ($286 million), said in a brief announcement yesterday that "in view of the current market conditions and with the investors' best interests in mind" it had decided "not to proceed with the global offering under the original timetable".

The company offered no explanation of why it had made this decision, but given that it had already completed the bookbuilding and was due to price the deal last Friday, it is fair to assume that there simply wasn't enough investor interest. Using a standard phrase for these types of occasions, the Tianjin-based developer said it will continue to review the situation and will make a further announcement when it has made a decision regarding a re-launch.

The cancellation of the listing comes six weeks after Excellence Real Estate Group was forced to pull its $1 billion offering on the day it was scheduled to price after failing to get enough orders to cover the deal even at the bottom of the price range. But while Excellence, whose IPO was being arranged by ICBC International, Morgan Stanley and UBS, was offering its shares at a premium to other property companies in the market at the same time, making it relatively less attractive from a valuation perspective, Sunac was in the market at a cheaper valuation than all the other Chinese developers that have listed in Hong Kong over the past 2.5 months. Had it been able to complete the offering, Sunac would have been the tenth Chinese real estate developer to list in Hong Kong since the end of September -- and it seems investors are now saying that was one or two too many.

As clear proof that Sunac's failure isn't an indication that investors are walking away from IPOs altogether, Shengli Oil & Gas Pipe Holdings received solid demand for its IPO, which was marketed at the same time as Sunac, and yesterday fixed the price just below the mid-point at HK$2.20 per share for a total deal size of HK$1.58 billion ($204 million). The manufacturer of transmission pipelines for oil and gas initially offered the shares at a price between HK$1.81 and HK$2.69.

According to a source, Shengli's institutional tranche, which initially made up 90% of the deal, was about 4.5 times covered. However, overall orders were greater than that since retail investors subscribed for 120 times the shares initially earmarked for them, which triggered a full clawback that increased the size of the retail tranche to 50% of the deal from the 10% initially. Consequently, the institutional tranche will drop to 50% as well, resulting in a subscription ratio of about 8.1 times post clawback.

About 60% of the institutional tranche was said to have been allocated to long-only funds, while about 25% went to hedge-funds and the remaining 15% to others, including high-wealth retail investors. In terms of geographies, 46% was bought by Asia-based investors, about 30% by European accounts, while onshore US investors picked up close to a quarter of the shares.

Investors liked the infrastructure angle and the straight-forward growth story; Shengli is a cash-generating business with a good market position that is exposed to a growth sector. And according to one source, investors "didn't worry too much about valuation multiples".  

China's need to expand its energy infrastructure should ensure high growth for the pipeline infrastructure industry which, partly because of strict environment and safety regulations, has only seven players. Shengli is the only independently owned one, while its six competitors are all owned by larger corporations such as Sinopec and China National Petroleum Corp. While this puts Shengli in a good position to benefit from the industry growth, it also means that there are no listed companies to compare it to.

According to the listing document, Shengli was the largest manufacturer of spiral submerged arc welded (SSAW) pipes in China at the end of 2008 in terms of annual production capacity, and in the first half of this year it increased its market share in China to 22% from 17% in 2008.

The market share gains have come on the back of an extensive expansion, which has also led to a sharp jump in earnings this year. At the half-year mark, the net profit amounted to Rmb144.88 million ($21 million), which was already more than 97% of the profit it achieved in 2008 as a whole. A syndicate analyst estimates that the net profit will increase by 125% this year, followed by growth of 30% in 2010 and 44% in 2011.

The company sold 720 million shares, of which 600 million were new. The total deal size translates into 30% of its enlarged share capital. As usual there is a 15% greenshoe that could increase the total proceeds to as much as $235 million. At the final price, the company is valued at about 10.7 times next year's earnings.

Shengli was brought to market by Macquarie and will start trading on December 17.

Meanwhile, Sunac was trying to sell 600 million shares at a price between HK$2.90 and HK$3.70, which translated into a 2010 price-to-earnings multiple of 4.7 to 5.9 times. The company has an established track record in terms of consistently buying land on the cheap and benefitting from asset appreciation, which has lead to wider-than-average margins. That said, it focuses on much the same type of developments as many of the other property companies that are already listed in Hong Kong, namely mid- to high-end residential projects, typically with commercial elements such as retail podiums, in tier-1 cities like Beijing, Tianjin, and Chongqing. In other words, it is entirely possible that investors just didn't see much need to own this particular developer.

The company 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.

Deutsche Bank and UBS were the joint bookrunners.

Investors aren't turning their back on the real estate sector altogether though. On Friday, Singapore-listed Suntec Reit, a real estate investment trust sponsored by a group of Hong Kong developers, including Li Ka-shing and New World Development chairman Cheng Yu-tung, raised S$152.9 million ($110 million) from a private placement that, according to a statement, was more than five times oversubscribed. The proceeds will be used to repay debt, lowering Suntec's gearing to 31.5% from 34.3%.

The trust offered 128.5 million new units at a price between S$1.16 and S$1.19 apiece, and after a three-hour accelerated bookbuilding, fixed the price at the top of the range at S$1.19 -- a 7% discount versus Thursday's closing price of S$1.28. The placement attracted "strong participation" from both existing unitholders and new investors and the new units were allocated to more than 60 quality institutional investors, Suntec said.

The Reit was suspended from the opening and the placement was completed by lunch, allowing for the resumption of trading from 2pm. The unit price held up well and closed unchanged at S$1.28 on Friday. Yesterday it dropped one Singapore cent to S$1.27.

Citi and Standard Chartered acted as joint lead managers and underwriters for the placement.

Listed in December 2004, Suntec Reit started out as the owner of the majority of properties in Singapore's largest integrated commercial development, the Suntec City office and retail complex. It has since expanded to include a few more assets such as the Park Mall and Chijmes, a historical building housing restaurants and retail shops. 

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