Powerlong Real Estate reduces IPO to $355 million

Powerlong Real Estate Holdings on Friday changed its initial public offering into a fixed-price deal and set the new price 17% below the original range. This means it will raise 44% less money than the maximum it was seeking earlier. According to a source, the commercial and residential property developer will give retail investors a chance to cancel their orders in light of this new development.

The company made the move at the end of a week that saw several debutantes on the Hong Kong stock exchange end down on their first day of trading.

Powerlong fixed the price at HK$2.75 per share, said a source close to the deal. This compares with an original price range between HK$3.30 and HK$4.90. The number of shares in the deal was said to remain the same at 1 billion, resulting in a final deal size of HK$2.75 billion ($355 million). When the company launched its roadshow on September 21, it was looking for as much as $632 million.

The revision came on the back of a terrible week for new IPOs in the secondary market. Since Metallurgical Corporation of China fell 11.65% in its H-share debut on September 24, all subsequent listings have dropped below their IPO prices. Two apparel companies, China Lilang and Peak Sport Products, lost 0.8% and 17% respectively on their first day.

But the real concern for investors pondering buying into Powerlong was the other Chinese property companies that debuted last week. China South City Holdings plummeted 23% when it started trading on Wednesday after fixing the IPO price at the top of the range, while Glorious Property failed to live up to its name and fell by 14.5% on its first day on Friday -- the day that Powerlong was expected to announce the pricing of its IPO.

The source close to the deal said that although Powerlong's institutional order book was covered within the original range, it would have been a mistake to force the deal out at a price where it was likely to trade down. Instead it was decided to "price at a point where people had greater conviction in the face of new information, namely a terrible IPO market". The source went on to say that investors are currently more concerned with the condition of the IPO market than with the fundamentals of the companies looking to list.

The order book was immediately covered at the new price of HK$2.75, which values the company at 6.3 times its projected earnings for 2010 and at a 53% discount to net asset value. To put this into perspective, Glorious Property priced its $1.28 billion IPO in the bottom half of its indicative range, valuing the company at 10.4 times its projected 2010 earnings

At the new price, the Powerlong offering was said to have attracted around 70 accounts. The geographical demand leaned towards Asian investors, but there were also some substantial orders from the US.

Demand from retail investors, who have to subscribe for Hong Kong IPOs at the top of the price range (they get a refund if the price is fixed below that), was enough to cover only three-quarters of the 10% retail tranche. And it could end up even lower than that since, due to the change in the deal terms, the retail tranche will be reopened from Tuesday to Thursday this week. Retail investors will not be able to put in new orders, but they will have the option to withdraw their earlier orders -- a move not dissimilar to what happened when SJM Holdings listed last year. Because of this, the listing has been pushed back by a week. Instead of listing on October 8 as initially scheduled, Powerlong will now start trading on October 15.

Powerlong is a property company with a distinct business model. Its typical development is a shopping mall with a block of flats on top. Instead of selling all the units when construction is completed, it keeps half of the commercial property, which it then rents out. The advantage of this is that it gives a diversified revenue stream made up of sales income, combined with rental income and capital appreciation. The company focuses on second- and third-tier cities, and it intends to use most of the capital raised to expand its land bank.

Goldman Sachs, ICBC and Macquarie arranged the IPO.