Chinese property developer Jiayuan International is hoping that recent government initiatives to reignite the property market may give its Hong Kong initial public offering a boost.
The residential and commercial property developer launched the deal on Friday and is on track to become the first company to list in Hong Kong since Virscend Education went public on January 13. It is tentatively scheduled to list on March 8 under the current timetable.
CCB International is the sole sponsor of the IPO and a joint bookrunner with Haitong International.
Indicative terms include the sale of 450 million shares, or 25% of the company’s enlarged share capital, at an indicative price range of HK$1.49 to HK$2.48 per share.
At that range total proceeds will amount to as much as $143 million and as little as $86 million, excluding an over-allotment option for an extra 15% of the company, which could potentially lift the offering size to as much as $165 million.
Even at the top-end of the price range Jiayuan will rank among the smallest mainland property companies in Hong Kong by market capitalisation. As such, the company will have to come up with a good marketing strategy during the course of its management roadshow running till March 2.
Prime location
One likely selling point is the location of its 19 residential and commercial development projects in eastern China’s Jiangsu province, which last year had the highest per capita GDP among all of China's provinces. As a result Jiayuan is in a position to sell its houses at higher prices compared with other regional developers of similar scale.
According to Jiayuan’s preliminary prospectus, the contracted average selling price of its properties amounted to Rmb9,833 per square metre as of the end of August last year. The ASP has risen by 28% compared with the end of 2014, even though overall home prices in China have been stagnant due to oversupply.
Guangdong-based China Aoyuan Property Group and Henan-based Central China Real Estate, which are similar to Jiayuan in terms of business scale, reported lower ASPs of Rmb7,383 and Rmb5,419 per square metre as of the end of June.
Jiayuan also possesses relatively huge land reserves, with 4.6 million square metres banked as of the end of November last year. That is sufficient for more than 15 years of development based on its average annual contracted sales of around 300,000 square metres.
The company clearly recognises its competitive advantages and may have taken them into account when setting up the indicative valuation range for investors.
A source familiar with the company said the deal is being pitched at a discount of between 63.5% and 77.3% over Jiayuan's forecast net asset value at the end of the current financial year. In price-to-earnings terms the company is pitched at 3.49 times to 5.81 times its forecast 2016 earnings.
A bottom-end valuation would put the company at a discount to Aoyuan and Central China, which traded at 65.8% and 60.4% below their respective NAVs based on Friday’s closing price.
But the valuation discrepancies might be much smaller on a forward-looking basis. Indeed, Jiayuan may even end up valued at a premium against its peers if the final price is at the more expensive end of the range.
Supportive policies
Beijing implemented tighter housing controls between 2011 and 2014 in an attempt to rein in skyrocketing home prices but these measures have partly contributed to a slowdown in Chinese economic growth.
To stimulate home purchases and greater investment in the property sector, the authorities reduced the minimum down payment for first- and second-time house buyers in most cities earlier this year.
Earlier this month the Ministry of Finance also announced a property tax cut in most cities to encourage home buyers. Property transaction tax for first-time house buyers was reduced to 1.5% from 2%, while second-time buyers will now be subject to a levy of 1% to 2% depending on the property size. Before the adjustment they were required to pay 3% regardless of the flat size.
The impact of these measures is yet to be reflected in the share price performance of property companies. Aoyuan and Central China have fallen by 12.9% and 17.9%, respectively, so far this year, outpacing the Hang Seng Index’s 11.6% loss.
