Sunac offers IPO at record low valuation as Kaisa prices at bottom

Sunac China Holdings has set a price range for its initial public offering that values the Tianjin-based developer below the other property companies that have listed in Hong Kong over the past couple of months. Based on a price per share between HK$2.90 and HK$3.70, the company is valued at 4.7 to 5.9 times its projected earnings for next year, according to a source -- well below the 10.4 times that Glorious Property Holdings achieved as the first-mover among the 10 property developers that have come to market since mid-September.

With a couple of exceptions, valuations have been trending lower since then but at the bottom of the range Sunac is looking cheap even against the lowest valued among them -- Fantasia, which priced at a 2010 price-to-earnings multiple of 6.5, and Evergrande Real Estate, which fetched a 2010 P/E multiple of 5.5 times. Sunac is seeking to raise up to HK$2.22 billion ($286 million).

But perhaps this is what is needed now. There have been plenty of signs that investors are getting a bit fatigued with the deluge of property stock that the market has had to absorb recently, including muted interest in the IPOs themselves and poor aftermarket performance. Fantasia, which was the latest one to debut on November 23, fell 8.7% during the first three days of trading but has since been edging higher and yesterday closed 4 HK cents above its IPO price, at HK$2.22.

Pointing to the same thing, sources said Kaisa Group Holdings received modest interest for its IPO and faced with a price sensitive order book the Shenzhen-based developer yesterday priced the deal at the bottom of the offering range. At a final price of HK$3.45, Kaisa raised HK$3.45 billion ($445 million) and is valued at 6 times next year's earnings.

The 90% institutional tranche was said have been a bit more than two times covered, while the 10% retail tranche was close to three times subscribed. However, the good thing, according to a source, was that there was no "fluff" in the book, i.e. the orders weren't inflated by investors expecting to get scaled back and also there were no momentum orders from short-term players looking to sell out shortly after listing to cash in a quick profit.

In fact, the source said, the quality of the order book was pretty good. Demand was said to have been particularly strong from Asia-focused funds based in the UK, and the deal also attracted some quasi-property specialist from the US. All in all, some 40 investors submitted orders. The deal was supported by four cornerstone investors buying a combined $60 million worth of shares, or 13.5% of the final deal size. Cheng Yu-tung's Chow Tai Fook and Choi Chee Ming are each taking $20 million worth, while Joseph Lau from Chinese Estates and Yeung Ching Loong are each investing $10 million.

Kaisa is also backed by a number of pre-IPO shareholders, including Carlyle and Temask, which will not be selling any shares in the IPO.