Volatile market prompts Yanlord to reduce IPO size

Upscale mainland residential developer now aims to sell 20% of company to raise about $270 million.
Chinese property developer Yanlord Land Group has decided to sell only 20% of the company in its ongoing initial public offering due to the choppy market environment. This will reduce the deal size to about S$451.4 million ($270 million).

The company, which is seeking a listing in Singapore, had initially planned to raise about $350 million by selling 25% of its issued share capital.

According to investors, the number of new shares on offer has been cut accordingly to 342 million from 456 million. The shares are offered at a price between S$1.08 and S$1.32 apiece, which will value the company at about 10 to 12.7 times its projected 2006 earnings.

Among ChinaÆs nation-wide developers, China Overseas Land and China Vanke trade at about 15 to 16 time this yearÆs forecasts earnings.

The indicative price range also pitches the developer at a 20-35% discount to net asset value, which is a valuation model preferred by many analysts given that the earnings stream for property developers can fluctuate a lot between years when big projects are completed and years when there are fewer or no projects hitting the market.

The companyÆs indicated discount compares with an average 22% discount to NAV for other mainland developers, according to syndicate research.

Yanlord, which is brought to market by CLSA and HL Bank, launched its roadshow two weeks ago, but decided to delay setting a price range in the hope that global equity markets would stabilise before it had to put its cards on the table.

Indeed, there has been signs of this happening in the broader market over the past week. However, the performance of Chinese developers listed in Hong Kong has been mixed. This has been the result of the mainland government's recent announcement of a new set of measures aimed at curbing speculation-driven price increases at the upper end of the property market while ensuring a sufficient supply of affordable homes for low- and mid-income earners.

Sources say the policy changes had caused concerns among potential investors, although the general view among analysts appeared to be that any negative impact on listed property counters would be short-lived.

Being the first of a batch of four mainland developers looking to go public this month, Yanlord is reckoned to be attracting a fair amount of interest. This comes both from Singapore funds û which have few opportunities to invest in decent size mainland property plays in their home market û and Hong Kong funds, which are viewing the stock in the context of its Hong Kong listed peers.

According to sources, though, investors are viewing the new property measures in China as an opportunity to push YanlordÆs valuation downward and the book was said to contain a fair amount of price sensitivity. Many potential investors were also believed to be holding off on committing orders until they could compare they valuation with larger listing candidate Shui On Land (see other article for more on this transaction).

Yanlord will take its marketing to the US this week and will keep the order books open until June 13. The pricing is expected to be fixed a day later.

Having started its business in Shanghai and Nanjing in 1993 and 1994, Yanlord now develops upscale residential properties in seven high-growth cities, including Guiyang, Tianjin, Chengdu, Suzhou and Zhuhai. Its projects are typically large-scale, multi-phased apartment projects with emphasis on construction quality and aesthetically pleasing and efficient designs.

Among its high-profile projects are the Yanlord Riverside Gardens, which will comprise 25 high-rise apartment blocks within 15 minutes from ShanghaiÆs financial centre in Pudong when all four phases are completed. The company has also recently began developing high-grade commercial properties in prime locations for sale or lease. The first such investment property has just been completed and it is expected to finish one more in each of the coming four years.

According to one syndicate analyst, the company has a reputation of post-sales services and timely expansion into other markets and is well positioned to sustain its earnings growth momentum thanks to a cost-competitive land bank.

Syndicate research forecasts a 46% improvement in net profit in 2006 and another 75% to S$312 million in 2007 when six new projects will be completed. The gross rental yield is expected to rise to 10.4% in 2007 from 5.8% this year.

As of the end of last year, the company had total assets of S$1.65 billion ($990.5 million) and a net gearing ratio of 46%, which compared with an industry average of over 70%.

However, market watchers noted that YanlordÆs focus on the high-end of the market could make it vulnerable as the government tries to limit speculative buying, which is more common in the luxury part of the market. Among the measures announced by the government last week was an extension from two to five years of the period during which a sales tax will apply to the re-sale of properties.

Another measure that could impact on the demand was the increase of the downpayment for getting a mortgage to 30% from 20% on homes larger than 90 square metres.

The company has earmarked 2.2% of the shares for Singapore retail investors, while 97.8% of the deal will be sold to international institutions. The latter tranche will include shares reserved for directors, employees and associates of the company. There is also a greenshoe option of up to 20% of the original deal size, which could lift the total deal size to S$541.7 million ($324 million) and leave the company with a 24% freefloat.

Investors are also expecting Shimao Properties and China Greentown to launch their respective IPO marketing this month or early July. Shimao, which focuses on residential projects in Shanghai, the wider Yangtze River Delta and Beijing - and also has an investment portfolio of serviced apartments and hotels - is aiming to raise about $600 million. The company has received a preliminary listing approval, but needed to update certain information before getting the final go ahead for the IPO, which will be arranged by Goldman Sachs and Morgan Stanley.

China Greentown, meanwhile, is hoping to attract interest because of its focus on villa-style and low-rise housing for home buyers in the mid-income bracket and its high level of pre-sales. The Hangzhou-based company will be brought to market by JPMorgan and UBS and is targeting at least $500 million.

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