The increase, which will lift the maximum pre-greenshoe deal size to HK$3.63 billion ($467 million) from $438 million, came on the fourth day of the institutional roadshow and two days ahead of the launch of the Hong Kong public offer and is a clear indication that the deal is going well. However, it also suggests that, at the time of the launch on October 24, the bookrunners may not have felt all that convinced that the deal was going to be a runaway success or that the local stockmarket would continue to head higher.
But over the past five trading sessions, the Hang Seng Index has rallied 11.3% and broken through both the 30,000 and 31,000-point level. It finished yesterday at a new record high of 31,586.9 points, resulting in a year-to-date gain of 58%.
Zhong An, which is brought to market by Deutsche Bank and JPMorgan, is the second Hong Kong listing candidate in one week to raise the initial price range after Alibaba.com lifted its entire range to HK$12 to HK$13.50 from an initial HK$10 to HK$12, representing a 12.5% increase at the top end. Alibaba subsequently priced its offering at the top end after attracting wide-spread interest from institutions, corporate investors and private banking clients as well as record orders (in dollar terms) from retail investors. This suggests the higher valuation didnÆt scare off investors to any significant degree.
The next test for AlibabaÆs valuation will come on Friday when the stock is due to start trading.
Zhong An increased the top end of its IPO range from HK$6.25 to HK$6.67, but kept the floor at HK$5 û supposedly to give it some additional flexibility should the market suddenly turn. The new range will value the residential developer at 11.9 to 15.9 times its projected 2008 earnings, based on the consensus syndicate estimates, or at a 25.9% to 41.5% discount to net asset value. Most analysts and investors prefer to value the stock on a P/E basis.
Its closest comparables trade at an average 2008 P/E ratio of about 17 times, although the valuations vary quite significantly, from about eight times for SPG Land (the smallest one in terms of market value) to 24 times for Singapore-listed Yanlord. Greentown China trades at about 14 times.
Zhong An, which has the majority of its developments and land bank in the city of Hangzhou in the Greater Yangtze River Delta region that is one of ChinaÆs wealthiest and fastest growing areas, is selling 27% of its enlarged share capital pre-greenshoe in the form of 543 million new shares. The offering has the usual 90:10 split between institutional and retail investors and standard clawback triggers will apply. The latter could increase the size of the retail tranche to a maximum 50% of the total base deal in case of strong retail demand.
If the greenshoe is exercised in full, Zhong An could end up raising as much as $537 million from the offering before expenses.
Four cornerstone investors have jointly agreed to buy $110 million worth of shares at the IPO price and depending on the final price, they will now take between 23.6% and 31.4% of the total deal. Sources say the four investors are: Chow Tai Fook, which is the private investment vehicle of New World Development Chairman Cheng Yu-tung; Starr International, an investment company owned by former AIG personality Maurice Greenberg; Chinese EstatesÆ chairman and CEO Joseph Lau; and Peter Woo, who is the chairman of property and retail conglomerate Wheelock & Co.
Among the key selling points for this IPO, observers say, is Zhong AnÆs strong brand recognition and its low-cost land bank of 5.2 million square metres, which makes it well positioned to benefit from the long-term rise in property prices. According to a syndicate report, its average land cost so far is only Rmb620 per sqm ($83), compared with selling prices of Rmb2,500-11,000 per sqm. Analysts project its net profit will grow at a compound annual growth rate of 43% in 2008-2010 from an estimated Rmb19 million in 2007. The volume of completed units will increase significantly from next year, resulting in the bottom line jumping 43 times in 2008 to Rmb829 million, they say.
Among company specific concerns, investors would want to be aware of the execution risk as Zhong An still doesnÆt have land titles for 39% of its land bank. The company has also outlined plans to expand its current residential developments beyond the three cities it is currently in and to move into the hotel business. Despite having no prior experience in hotel investments it says it aims to have five hotels up and running by 2012.
The final price is expected to be set on November 7 and the trading debut is scheduled for November 13.