Powerlong Real Estate goes ahead with $632 million IPO

Powerlong Real Estate Holdings yesterday launched an initial public offering that is expected to raise as much as HK$4.9 billion ($632 million). The IPO launches over a year after the company initially tested the markets before the financial crisis started last summer.

The base deal is made up of 1 billion shares, of which 850 million are primary shares and the remaining 150 million secondary. The secondary shares are being sold by Hoi Kin Hong, chairman of the board and president of the company, and Hoi Wa Fan, an executive director. After the IPO they will be subject to a six-month lockup on their remaining shares. An indicative price range has been set at between HK$3.30 and HK$4.90 a share.

The standard 15% greenshoe could introduce a further 150 million shares into the deal, bringing the maximum possible deal size to $726 million.

Powerlong is a Chinese commercial property developer that focuses on building large multipurpose developments. Geographically, the company concentrates on second- and third-tier cities in provinces such as Fujian, Jiangsu, Shandong, Henan and Anhui. These areas not only provide cheaper land than first-tier cities, such as Beijing and Shanghai, but a much steeper growth curve, as development catches up with the coastal areas.

What makes Powerlong stand out from all the other Chinese property developers, is its distinctive business model. A typical development for the company would be a shopping mall with a block of flats on top. Upon completing a project, the company sells off all of the residential property and half of the commercial property. The remaining commercial property is then rented out. The advantage of this is that the source of the company's revenue is diversified between sales on the one hand, and rental income and capital appreciation on the other.

The company has four completed projects, three in Fujian and one in Henan. It also has a further seven projects under development and six more held for future development.

When it looked at listing last year, the company only had one completed project. One advantage of holding off for a year is that it has got three more projects completed, which gives it an improved track record and provides some vindication of the business model.

The price range values Powerlong at between 7.5 and 11.1 times its 2010 earnings, according to joint bookrunner estimates. Investors are also using a discount to net asset value (NAV) to evaluate the company. The price range puts the company at between a 22.4% and 44.8% discount to NAV.

On a price-to-earnings basis, Powerlong comes a little cheaper than another Chinese property company that is on the way to listing. Glorious Property Holdings started bookbuilding for its $1.5 billion IPO last week at a price range that values the company at between 9.5 times and 12.4 times its projected earnings for 2010, with a corresponding discount to NAV range of between 34% and 47.5%.

With regards to peers that are already listed, Chinese property companies listed in Hong Kong are on average trading at a 30% discount to NAV. Investors are comparing Powerlong to Shimao Property Holdings and China Resources Land which are currently trading at 12.5 and 18.9 times their predicted 2010 earnings, respectively.

Powerlong intends to use 75% of the capital raised to expand its land bank. The remaining 25% will be split fairly evenly between repaying bank loans, financing the development of existing projects and general working capital purposes.

Macquarie is the sole global coordinator for the deal, while Goldman Sachs and ICBC and Macquarie are joint bookrunners. The roadshow started yesterday, with an investor luncheon to be held in Hong Kong today. The final price will be determined on September 30 and the company is expected to list on October 9.