The price, which results in a deal size of HK$1.20 billion ($154 million), marks a slight valuation discount versus fellow property developer Shui On Land which will start trading on October 4 after fixing its IPO price at the top end with a 30% discount to its net asset value.
While both of these developers are based in Shanghai, they don't share many similarities. They each have different business models and acquisition strategies, but because they have tapped the equity markets at the same time, they are being compared in terms of valuations.
At the final price, SPG Land is valued at a 31.6% discount to NAV. The stock was offered in a range between HK$4.28 and HK$4.90 per share, which equaled a discount range of 30%-38%.
Aside from Shui On Land, many of the companyÆs other comparables also currently trade at NAV discounts between 20% and 30%, although individual valuations differ widely from about 10% to 35%.
According to sources, there was enough demand for joint bookrunners DBS Asia Capital and Macquarie Securities to fix the price at the top, but the company wanted to leave a bit on the table for its investors to help promote a healthy after-market rather than get a few extra dollars in its coffers right away.
ôSince the existing shareholders arenÆt selling any secondary shares yet, it is very much in their interest that the stock does well and that the company generates a good rapport with shareholders," says one source.
At the time of listing, the company will be about 72.9% controlled by founding chairman Wang Weixian through his Australia-incorporated holding company Starwaly Properties (Group) and a series of other holding companies on behalf of him, his family and the group managing director. These shares are subject to a six-month lock-up.
Institutional investors submitted orders for more than 20 times the shares initially available to them through the 90% global offering, while retail investors subscribed for more than 80 times the 10% earmarked for them. The strong retail demand - which totaled HK$9.8 billion compared with the HK$7.44 billion tied up by Shui On LandÆs five times larger offer - triggered a clawback that will increase the retail tranche to 40%.
The number of shares available to institutions will be reduced accordingly. However, professional investors will get even fewer shares than that since close to one third of the total deal will go to four anchor investors who havenÆt been disclosed. One of them is believed to be a well-known company in the hotel business. One source says the quartet had initially planned to buy even more shares, but their investment was scaled back to leave more paper for other institutions given the good response.
The institutional order book contained a ôgood mixtureö of long-term funds and hedge funds, including a lot of specialty property funds from both Hong Kong and continental Europe, the source says. About 65%-70% of the demand was Asia-based, while the remainder was divided between European and offshore US funds.
While there are a lot of small- to medium-sized Chinese developers to choose from these days, investors were drawn to SPG LandÆs hotel developments which one observer describes as ôthe sexy part of the businessö. It is also the part of the business that is expected to drive earnings growth from 2008 onwards.
In particular, investors liked the companyÆs 50-50 joint venture with Hong Kong & Shanghai Hotels that will start construction on The Peninsula Shanghai within the next couple of months. The hotel is expected to open by 2009.
The company is also building a second hotel as part of a larger residential and commercial project on land that sits next to the proposed site for a future Shanghai Disneyland and has plans for a third.
While this new focus may be regarded as an earnings kicker, it is worth noting that the diversification has come about as a way of easing a persistent problem with negative cash flows and net liabilities in recent years. SPG hopes that the long-term recurrent income generated by the hotels will fill those holes.
Aside from the hotel business, SPG is an asset light developer that focuses primarily on residential properties for the mid- to upper-class segment of the market, including villas and town houses. It currently has six projects at different stages of development, including a resort development in Huangshan that is expected to open for commercial use by 2009. These projects have a combined gross floor area of 2.42 million square meters.
While distinctly smaller, this also makes SPG much leaner and easier to review than Shui On Land, which engages in multi-year local-government sponsored urban renewal projects aimed at modernising entire run-down city sections. Shui On sits on a land bank of 8.1 million square metres of gross floor area and open areas.
SPG offered 250 million new shares plus a 15% greenshoe that could boost the final deal size to HK$1.37 billion ($177 million).
About 60% of the proceeds will go towards the financing of future acquisitions of land or companies holding land. The main focus is on second-tier cities outside of Shanghai and, according to one source, the company has already identified a few potential targets.
SPG's shares will start trading on Hong KongÆs main board on October 10.
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