Longfor prices near top to raise $912 million

Longfor Properties was able to live up to expectations that its initial public offering would be able to attract significant investor interest despite a much higher valuation than the recent market newcomers in the same sector, proving that investors are still willing to pay up when they see something they like.

In this case, they were primarily banking on Longfor's continued transformation from a regional developer into a fully-fledged national player with strong bases in Chengdu and Beijing. The company's immediate plans include the expansion into high-growth areas such as the Pan Bohai Rim and the Yangtze River Delta.

According to sources, the developer, whose projects include a wide range of mid- to high-end residential developments spanning from high-rise apartment buildings to townhouses and luxury stand-alone houses, as well as shopping malls and other commercial properties, attracted close to 400 institutional investors and enough retail investors to trigger a full clawback. The latter resulted in the retail tranche being increased to 40% of the deal, from the original 10%.

Adjusted for that and excluding the 22% cornerstone tranche, the shares that remained for institutional investors (including the 15% greenshoe) were about 45 times covered. With little price sensitivity, the deal could easily have priced at the top of the HK$6.06 to HK$7.10 range, but in light of the poor trading debuts for several other Hong Kong IPOs over the past couple of months, the somewhat wobbly secondary market, and the large amount of equity supply still to come, the company chose to price slightly below the maximum at HK$7.07.

It is questionable whether a modest 3 cent concession actually qualifies as "leaving something on the table" for investors and whether it is really sufficient to have an impact on secondary market trading. But, as sources close the IPO said, it is at least a gesture in the right direction and should perhaps be viewed more as a symbol of the company's intention to enhance shareholder value.

At the final price, Longfor raised HK$7.07 billion ($912 million), making it the second largest real estate IPO in Hong Kong this year behind Shanghai-based Glorious Property Holdings' $1.28 billion deal in September. The largest IPO by a Chinese property developer in Hong Kong was Soho China's $1.9 billion offering in September 2007. 

The high pricing valued Longfor at a 30.3% discount to its estimated net asset value for 2010, based on the bookrunner consensus, and at 13.9 times the projected earnings for that same year. This is significantly more expensive than any of the other recent property IPOs, which have come at increasingly lower valuations as investors started to shun the sector. Evergrande Real Estate, which was one of the most successful of these earlier IPOs in terms of demand, priced at a 2010 price-to-earnings ratio of 5.5 times and a 48.5% discount to its estimated 2010 NAV, both on a pre-money basis. Glorious, which had the advantage of being a first-mover among what turned out to be a slew of property IPOs, achieved a 2010 P/E multiple of 10.4 times.

Syndicate analysts argued that Longfor deserved the premium valuation because of its strong brand name and high customer loyalty, which enables it to command premium pricing, as well as its ongoing transformation towards becoming a true nationwide developer, which it is achieving at a reasonable land cost thanks to its scalable organisation structure. And investors clearly agreed.

The conversion ratio from the management's one-on-one meetings during the roadshow was very high, and just about all key global funds that are active in Asia were represented in the book. The institutional demand was weighted heavily in favour of long-only names and the buyers also included a number of dedicated real estate funds. Retail investors asked for about 57 times the number of shares earmarked for them. Asia led the institutional demand with more than 60% of the book. The rest was split between the US and Europe, with a slight bias for the US.

Longfor sold 1 billion new shares, or 20% of the company. Of this, $197.5 million worth of share were set aside for five cornerstone investors, including Temasek, Government of Singapore Investment Corp, Hongkong Land, Ping An of China Investment Management and BOC Group Investments. These guys will be locked up for six months.

Citi, Morgan Stanley and UBS are the joint bookrunners. The shares are scheduled to start trading in November 19.