Glorious brings first China property IPO in more than a year

Investors who have been waiting to buy shares in a Chinese developer at the kind of discounted prices only seen in initial public offerings may finally get their chance. On Monday, Glorious Property Holdings kicked off the institutional roadshow for its long-awaited IPO, which, if successful, will result in the first listing of a pure Chinese property play in more than a year.

Glorious isn't likely to be the only one, however. Bankers estimate that as many as 10 other developers are currently at various stages of preparation for a Hong Kong listing over the next few months. That said, Glorious will be one of the larger ones, which is reason enough for investors to take a look.

Indeed, the deal is somewhat larger than the $750 million to $1 billion that was earlier flagged by bankers. The company has been able to use slightly richer valuation multiples following sizeable gains in the share prices of some of its key comparables over the past couple of weeks.

The Shanghai-based developer is now looking to raise between HK$9.0 billion and HK$11.9 billion ($1.2 billion to $1.5 billion), making it the largest Chinese property IPO in Hong Kong since Soho China raised $1.9 billion in September 2007. Deutsche Bank and J.P. Morgan are joint global coordinators, with UBS joining in as a bookrunner.

Glorious is offering 25% of the company in the form of 2.25 billion shares, of which 83.3% are new. The remaining 375 million shares will be sold by an entity owned by founding chairman Zhang Zhirong, who currently controls 99.3% of the company. There is also the obligatory 15% greenshoe, which is made up entirely of secondary shares, and which could increase the total proceeds to as much as $1.77 billion.

The price ranges from HK$4 to HK$5.30, which translates into 9.5 to 12.4 times the projected earnings for 2010 or a discount to net asset value of 34% to 47.5%, based on the bookrunner consensus. Of the two global coordinators, J.P. Morgan is focusing on a P/E valuation, while Deutsche Bank prefers to look at discount to NAV. However, sources say the valuations resulting from the two methods largely correspond to one another. Analysts project about 50% growth in revenues between 2009 and 2010, while the bottom line growth is expected to be closer to 80%.

On a P/E basis, the price range puts Glorious at a discount to three of its key comparables, namely Sino-Ocean Land and Shui On Land, which both trade about 15 times next year's earnings, and Singapore-listed Yanlord Land, which is quoted at about 14 times. Shimao Property Holdings, which is also based in Singapore, was quoted at about 11.5 times at the time Glorious set the price range, but as of yesterday's close it had moved up to 12.7 times, meaning it too is now at a premium to Glorious.

On a discount to NAV basis, Glorious is looking even cheaper, with Yanlord and Sino-Ocean both trading at discounts in the teens, according to a source, while Shimao and Shui On Land are quoted 28% and 31% below their respective NAVs.

The most recent Chinese developer to list in Hong Kong was Central China Real Estate, which raised $176 million in an IPO in early June 2008, at the tail end of an IPO window that was shutting fast. Glorious too was planning a listing in June last year and went as far as completing the pre-marketing before deciding that the market was too challenging to launch the deal.

Things have obviously changed since then, with the Hong Kong stockmarket first dipping significantly in the months following the collapse of Lehman Brothers as the liquidity crisis saw investors keep their money close to their chests, and then rallying strongly from early March as confidence returned and the belief in a sustainable economic recovery grew stronger. The Hang Seng Index reached a 12-month high above 21,100 points last Friday and is currently up 84% since the low-point on March 9.

The Chinese housing market is also in better shape following the collapse in 2008. End-user demand has started to pick up again, partly thanks to various government measures to boost home buying and the sharp rise in loan growth, and average selling prices across China are showing signs of recovering. In some major cities like Shanghai, average selling prices have been on a steep upward trajectory over the past few months.

Glorious Property too has a fitter appearance this time around thanks to the refinancing last month of close to $500 million of renminbi-denominated, US dollar-settled notes that were coming due in November this year. The notes, which carried a total borrowing cost of 23.5% per annum, were sold to entities of DE Shaw & Co, Goldman Sachs, Deutsche Bank and HSBC Nan Fung in late-2007 to help pay for the acquisition of new projects and, including accumulated interest, would have cost the company $710 million to redeem.

Instead, the company has now repaid $220 million; refinanced $325 million with an 18-month note that is repayable in three tranches over the duration of the note; and issued a $165 million convertible bond to cover the remainder of the original debt. It has also obtained a 2.5-year loan from the Shanghai Industrial Group of Rmb2 billion ($292 million), using part of its flagship Shanghai Bay project as collateral.

All in all, the company has significantly lowered its interest costs in 2009-2011, which means it will be able to put a much larger chunk of the IPO proceeds to work in its 19 ongoing property projects, while last year much of the money raised would have had to go towards debt repayment.

Marketing itself as a nationwide developer, Glorious has a good mix of projects both in tier-1 markets -- mainly Shanghai, Tianjin and Beijing -- and fast-growing tier-2 cities, which also puts it in a prime position to benefit as the Chinese economy continues to move out of the slump that followed the global financial crisis, people familiar with the company say.

Glorious focuses on mid- to high-end residential and commercial properties, including apartments, townhouses, retail properties and hotels, and has one of the largest land banks among the Chinese developers listed in Hong Kong at 13.6 million square metres, split roughly 40-60 between tier-1 and tier-2 cities and with 20% in Shanghai alone.

Among its key advantages, say sources, is the fact that much of the land bank has been acquired at a low cost, meaning it is boasting wide margins due to land price appreciation. The large exposure to Shanghai should also be positive in light of the upcoming World Expo to be held there in 2010. Glorious' flagship Shanghai Bay project -- which began construction in 2006 and will house 16 residential buildings when phase one and two are completed -- overlooks the World Expo site from across the Huangpu River, and will contribute significantly to the company's earnings growth over the next three years, according to one syndicate research report.

The deal has already attracted the support of four cornerstone investors, which have agreed to buy a combined $130 million worth of shares, or between 8.4% and 10.8% of the total offering, depending on the final price. However, a couple of these already have ties to the company through the earlier mentioned notes and loans. Shanghai Industrial Holdings will buy $50 million worth of shares, Nan Fung Group and fellow-Chinese developer Sino-Ocean Land will each take $30 million, and China Southern Fund Management will buy $20 million worth.

In addition, sources say some Hong Kong tycoons and a few Chinese corporates have also submitted orders already.

One source noted that investors don't seem too worried about fundamentals for the Chinese property market anymore, but that doesn't mean they will necessarily pile into upcoming IPOs.

"I don't think investors are going to price in a substantial increase in property prices as most people feel price increases have come through quite a lot already, although I think they will assume that prices are going to remain healthy and that end-demand will be there. However, at current prices some people say that not just the property sector, but the stockmarket in general is pricing in too much good news. I think that is a worry," the source said.

The offering starts out with 7.5% earmarked for retail investors, which can be increased to a maximum of 27.5% if the retail tranche is more than 50 times covered. The Hong Kong IPO will run from September 21 to noon on September 24 and the final price is expected to be set during New York hours that same day. The trading debut is scheduled for October 2.