Trade centre operator seeks $406 million from Hong Kong listing

China South City Holdings, a developer and operator of a large-scale integrated logistics trade centre in Shenzhen where suppliers of industrial goods can meet with potential customers, will kick off the formal roadshow today for an initial public offering that will aim to raise between HK$2.1 billion and HK$3.15 billion ($271 million to $406 million). The first company of its kind to list in Hong Kong, the company will offer investors a hybrid exposure to commercial property and the trading of industrial goods -- at a time when the global economy is showing real signs of a proper economic recovery.

The offering is launching just ahead of the roadshow (starting Monday) for Glorious Property, which is set to become the first Chinese property company to list in Hong Kong this year and looks likely to spearhead a batch of about 10 mainland developers that, according to bankers, are hoping to go public in Hong Kong before Christmas. While China South City isn't a developer in the same sense, it is involved in the construction of its trade centres and sells or leases units to industrial goods suppliers, meaning it is impacted by the trend in commercial real estate prices. The trade centres also include supporting functions like warehouses, commercial property and residential housing.

And like property developers, bankers argue that the most suitable way to value the company is on a discount to net asset value (NAV) basis. However, valuation will be a challenge given the hybrid nature of the business.

China South City is offering 1.5 million new shares, equal to 25% of the company, at a price between HK$1.40 and HK$2.10. The deal also has a 15% greenshoe, which could increase the maximum deal size to $467 million.

Based on a valuation by Savills, the indicated price suggests a discount to the post-money and post-shoe NAV of between 50.8% and 65.7%, according to a source. The NAV, estimated at between HK$25.4 billion and HK$26.6 billion, includes the existing business only, in other words the first two phases of the Shenzhen centre.

Sources note that there have been a lot of curiosity and interest among institutional investors for the deal. Among the buying arguments, they say, are the fact that the company is expected to have few competitors of the same scale in the short- to medium term, that it is focusing on the trade of industrial goods as opposed to consumer goods, and that it is looking to replicate its successful trade centre in Shenzhen in other regions.

According to one syndicate research report, local authorities are willing to provide supporting facilities and grant land to China South City at preferential terms because they see its mega logistics and trade centres as core infrastructure that will draw in other businesses.

The first phase of the Shenzhen centre has been fully operational since December 2004. The second phase is under construction and is expected to be completed in stages until the end of 2012. Once fully completed, the Shenzhen centre will have a gross floor area of about 2.63 million square metres, of which about 70% will be dedicated to trade activities. The remainder will be taken up be support facilities. The company is also planning to construct two new centres in Nanning and Nanchang and has signed an MOU for a potential fourth project in Xi'an.

However, the company hasn't yet secured the land plots in Nanning and Nanchang that it has identified for the two projects, which adds a fair amount of uncertainty to the proposition - not least with regard to the timing of when these centres may be completed. The company expects to acquire the land through a combination of public tenders, auctions or listings for sale.

This also highlights that the company is still at an early stage of expansion, and while the plans seem solid enough, the management will need to prove that it can execute on projects that are located some distance away from its Shenzhen headquarters.

The Shenzhen trade centre is built up around five key industries: metals, chemicals and plastics; textile and clothing; leather and accessories; electronics accessories; and printing, paper and packaging. These industries correspond to the background expertise of the company's five founding shareholders - each of whom are either the chairman or the executive director of leading manufacturing and industrial companies based in Hong Kong but with operations in the Pearl River Delta region.

The deal will stay open until September 22 and the trading debut is scheduled for September 30.

Bank of America Merrill Lynch and BOC International are the joint bookrunners on the deal.