Top of the ladder for Agile Property

Guangzhou property developers attracts strong retail demand.

Reflecting a major shift in attitude towards mainland property developers, Agile Property attracted large demand for its $406 million deal, which priced on Friday (December 9) Under the lead management of Morgan Stanley, the 955 million share deal came at the very top of its HK$3 to HK$3.30 range.

The Hong Kong retail element was 240 times covered, triggering full clawbacks to 50% to the deal, while the institutional portion saw demand of $9 billion, equating to an oversubscription rate of 22 times. Some 200 funds came in, many of them absolute return and long-only players with funds specializing in real estate. The conversion rate of the one-on-one meetings with managers came to 85%.

"Some 50% of the book was given to genuine real estate experts," says one specialist. Half the institutional book ended up going to the top ten investors. Because the retail clawback was so high, these 10 got about 5% of the deal each.

In terms of the geographic split, allocation was 45% to Asia, 35% to the US and 20% went to Europe. Specialists said the deal was massively momentum driven, but pointed out that Guangzhou real estate, on which the company focuses, has an attractive stability for investors.

"This is not a bad company which bought land cheap in the past and then sat back making easy profits as land prices rose," the specialist adds.

Nonetheless, Agile has a fully-funded landed bank, acquired when land was relatively cheap in 2001-2001. However, land supply is far less of a factor than in Hong Kong, but a land bank is useful given the introduction of increasingly competitive bidding structures on the mainland, and provides welcome earnings visibility.

Compared to Shanghai and its environs, house prices in Guangzhou have been far more stable, rising 6% in 2004, compared to 20% in Shanghai. Helping investors' comfort factor, the company has a familiar business model, complete with extensive marketing and advertising activity. The result is high margins per square metre, say specialists.

Historically, the company made its reputation selling to Hong Kong residents buying up property on the mainland. The quality of construction is thus perceived to be far higher than the usual.

"Investors were interested in a company, which could produce good yields in a stable pricing environment, and this company seems to fit the bill," the specialist continues.

Close comparables are Hopson and R&F, both based in Guangzhou. R&F listed in Hong Kong earlier this year and is trading 8.5 times 2006 earnings, while Hopson is trading 10.5 times. Agile priced at 9.2 times.

R&F is trading exactly at net asset value, while Hopson is trading at a 15% discount and Agile was priced at a 25% discount. Agile's land bank is 5.2 million square metres, a little lower than R&F's 5.3 million. However, the latter's market cap is twice as large.

"The market has re-evaluated the China property sector. When R&F listed in June this year it was done at half the valuation," the specialist concludes.

R&F's retail book was just 20% covered, but the stock price has gone up 160% since the IPO. A major reason for the revaluation is the feeling that the Chinese government's cooling measures earlier this year were aimed more at the Shanghai housing market than the national market.

Agile will start trading on Thursday.

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