Roadshows began on Monday for a HK$3.2 billion to HK$3.39 billion (US$414 million to US$437 million) IPO by Jinmao Investments and Jinmao (China) Investments, a property related spin-off from the Sinochem Group.
The deal is one of three related deals in the market, which are all hoping to take advantage of a recent window of opportunity for yield-based equity plays.
Formal roadshows for a Singapore IPO by Fraser’s Hospitality Trust are also scheduled to commence in the next few days, with pre-marketing feedback coalescing around a dividend yield of 7% estimated 2015 earnings and a deal size of about S$360 million ($287 million).
Right behind it, India’s Larsen & Toubro is also back out in the market for the first time since April, soliciting anchor orders for a qualified institutional placement of its road assets. Its proposed Singapore-listed vehicle, L&T IDPL, is being pitched on a dividend yield range of 10.7% to 12.2% estimated 2015 earnings.
Jinmao’s terms
Jinmao Investments is offering 30% of its enlarged share capital pre-greenshoe via a share stapled unit structure that will hold the hospitality assets and one landmark commercial asset belonging to Sinochem subsidiary, Franshion Properties.
The 600 million unit deal has a price range of HK$5.35 to HK$5.65, which represents a dividend yield of 8.5% to 9% estimated 2014 earnings. This places the range at the low end of syndicate analysts' fair value estimates ranging from 6.8% to 8.1%.
The range is also very narrow, providing a very strong indicator that investors have already given clear feedback about where the deal will clear the market. In this respect, $40 million has been allocated to four cornerstone investors comprising: Warburg Pincus, which is also a major shareholder of Franshion; Gordon Tang and his wife, Chen Huaidan, who both have big positions in Singaporean Reits and Shanghai Construction, which built Jinmao Tower - China's second tallest building.
Anchor investors, which did not want to be locked up for six months, are also said to have covered the remainder of the institutional tranche, with orders placed at the bottom end of the range. The IPO has the normal 90/10 split between institutional and retail investors, although qualifying Franshion shareholders are also being offered 80 million units through a preferential offering.
Roadshows will wrap up on June 24, with the Hong Kong public offer running from June 19 to 24 and pricing scheduled for June 25. Joint global co-ordinators are Deutsche Bank, DBS, HSBC, Morgan Stanley and Standard Chartered.
Investor concerns
At the bottom end of the range, Jinmao is being pitched at a discount to all of its Hong Kong-listed peers. While this could be interpreted as a sign of a weaker equity story, the leads argue that it demonstrates the opposite.
They say high quality assets have been married with one of the mainland’s most respected SOE’s, whose management understands the strategic benefits of being realistic about market conditions and offering investors a deal, which will trade up. If this proves to the case, Jinmao Investments will not only buck the trend for poor after-market performance by Greater China related Reits and business trusts, but could also help repair the sector’s reputation among a wary investor base.
As one banker put it, “Investors have not been happy about the secondary market performance of many IPO’s this year and on top of that, China-related Reits and trusts have a very poor standing in the fund management community. They generally associate them with weak asset quality and financial engineering that distorts the up-front yield.”
Long-standing structural concerns aside, investors are also likely to be circumspect about the macro outlook for both the Chinese property sector and the global interest rate environment. Where the latter is concerned, market conditions have surprised analysts who began the year expecting US Treasury yields to progressively creep up as tapering continued.
On the contrary, the first six months have been extremely benign, in the process re-energising Singaporean Reits, which have re-couped some of 2013’s losses. Key will be whether conditions remain this stable.
Signs that sentiment could be on the turn came last Thursday, with a surprise announcement from Bank of England Governor, Mark Carney, that UK interest rates could rise earlier than expected. This sudden about-turn shook the market out of its torpor on both sides of the Atlantic, with 10-year US Treasury yields spiking back above 2.6% the following day.
China-related property stocks, on the other hand, have all underperformed the market thanks to concerns about collapsing sales and overstretched balance sheets. Jinmao’s parent company, Franshion, is down 19.7% year-to-date, although its biggest decline has been since the beginning of April shortly after announcing its intention to create a second listed vehicle.
Part of the drop can be attributed to investors re-positioning themselves ahead of Jinmao’s IPO. However, the group has also recently been under selling pressure following a 56% fall in May’s year-on-year sales.
Valuation
Franshion is currently trading at a discount of 59% to NAV and an estimated 2015 dividend yield of 5%. Post IPO, it will own 70% of Jinmao Investments and consolidate it into its accounts.
Other comparables are also down. The three nearest comps in relation to hotels are Langham Hospitality Investments, Regal REIT and New Century REIT.
The closest to Jinmao in terms of hotel rooms is Regal with 4,570 compared to Jinmao’s 3,431. However, Regal has three mid-end hotels all located Hong Kong, compared to Jinmao’s portfolio of eight up-market hotels, all located in China.
Year-to-date, Regal is down 7.2% and is currently trading on an estimated 2014 yield of 8.9%.
New Century REIT, which listed last July, is currently trading on an estimated 2014 yield of 8.7%, down 7.3% year-to-date. Like Jinmao its portfolio is located in China, but is mid-scale.
Finally, Great Eagle group spin-off Langham Hospitality, which listed last May, is trading on an estimated 2015 dividend yield of 8%. It is down 6% year-to-date.
Alongside eight hotels, Franshion Properties has also included its iconic Jinmao Tower. The commercial rent it derives from the 88-storey skyscraper accounted for 24.1% of 2013 revenues (excluding the Grand Hyatt on floors 53 to 87).
This means that Jinmao’s IPO should also be benchmarked against other China-related Reits with commercial interests such as Hui Xian and Yuexiu. The former is down 12.7% year-to-date and is trading on an estimated 2014 yield of about 7.9 times, while the latter is down 20.5% and trading on a yield of roughly eight times estimated 2015 earnings.
Selling points
Jinmao’s greatest selling point is the high quality and strong brand name of its asset portfolio, which has helped it weather a downturn in both the tourism and property sector. It is also larger than its comparables in terms of asset value, with an independent valuation of HK$30.4 billion from DTZ compared to Regal’s HK$23.2 billion, Langham’s HK$17.6 billion and New Century’s HK$5.6 billion.
The eight hotels in its initial portfolio comprise: the Grand Hyatt Shanghai (20.5% of 2013 revenues), Westin Beijing (14.8%), JW Marriott Shenzhen (8.5%), Ritz Carlton Sanya (19.8%), Hilton Sanya (12.3%) and Hyatt Regency Chongming (opened June 2014), Grand Hyatt Lijiang and Renaissance Beijing (both opening end 2014).
Jinmao believes its diversification across China prevents concentration risk, while its hotels’ five star status are partially insulating the group from a downturn, which began in 2013. This was partly driven by the government’s anti-corruption drive, which impacted food and beverage revenues.
“The Chinese hotel industry has been very volatile of late,” one banker commented. “But Jinmao investments has been less affected because much of its F&B revenues comes from foreign companies and joint-ventures.”
Occupancy has consequently held up at 68% in 2013 versus 59% at New Century hotels and 54% at Hui Xian, which incorporates the Grand Hyatt in Beijing. Likewise RevPAR dropped by 2% to HK$1,434.6 in 2013 compared to a 4% drop at New Century to HK$430.
Guarantees
Bankers said Jinmao Investments opted for a stapled unit structure rather than a Reit so it can retain some cash for future growth and retain more flexibility. But it has also adopted a number of Reit features to provide additional security, including a gearing cap of 40% and a payout ratio of 100% in 2014 and 2015, followed by not less than 90% thereafter.
Franshion Properties has granted a call option to the trust for all hotel assets under development. Specifically, this includes phases one and two of Westin Nanjing, plus the Meixi Lake hotel in Changsha, which could boost the initial portfolio by 23% or 784 rooms.
Because some of the hotels in the initial portfolio are still in ramp-up mode, the group has also incorporated make whole provisions to cover Ebitda shortfalls from 2015 to 2017 up to a maximum cap of HK$300 million for the entire period. The group has also committed to pay out a guaranteed HK$960 million in dividends on an annualised basis.
