Yuzhou Properties, a residential developer based in Fujian province, has fixed the price of its initial public offering at the bottom of the range, according to a source, capping the deal size at HK$1.62 billion ($209 million). The outcome isn't that surprising given that it is the smallest of the four property developers that have been going head to head in the Hong Kong market over the past week. When investors make a decision about which IPOs they have time to research, the smaller ones are always in danger of losing out.
Incidentally, there have been rumours in the market that the second smallest, Mingfa Group (International), will also be forced to price low.
The fact that Yuzhou had no obvious edge against the other three property companies trying to list or against the host of Chinese developers that are already listed in Hong Kong would have made it even harder to attract investor attention. It also wasn't the cheapest offering in terms of valuations -- although looking at this company on a standalone basis, it certainly doesn't look expensive.
There were no details available on the level of demand for Yuzhou last night, although sources said the retail tranche was fully subscribed. The overall deal was believed to be only between two and three times covered. This would have been enough to get the listing out the door, but doesn't leave much of a comfort zone when it starts trading as many investors would already have received their desired allocation.
Yuzhou is set to start trading on November 2, i.e. next Monday.
Meanwhile, Excellence Real Estate Group and Mingfa are both due to announce the pricing of their respective IPOs today, followed by Evergrande Real Estate Group on Friday. Excellence and Evergrande are expected to have attracted the most demand given their larger deal sizes -- a larger deal typically means the stock will have greater liquidity and that it will be easier for investors to exit quickly, especially if the market is to suddenly reverse direction and start falling. Excellence is looking to raise up to HK$7.8 billion ($1 billion), while Evergrande is seeking up to HK$6.46 billion ($834 million).
Yuzhou is the largest residential developer in the city of Xiamen with a 10% market share and also has a small sideline of commercial properties. According to its listing documentation, it is committed to "high-quality design". Its focus on the Fujian province makes it a beneficiary of the government's aim to promote economic integration with Taiwan via the West Strait economic zone (Fujian is the centre of this), which was initiated in 2004 and written into the 11th five-year plan in 2006.
The company currently has 18 projects at various stages of development in Xiamen, Shanghai, Fuzhou and Hefei. Eight of the projects, with a combined gross floor area (GFA) of about 924,000 square metres, have been completed, while the other 10 projects, with an aggregate GFA of 3.1 million sqm, are in the works. Syndicate analysts noted that the landbank is relatively small and in the need of being replenished.
The company is projecting a net profit of at least Rmb1.07 billion ($157 million) in 2009, which would represent a 267% gain from 2008. However, these assumptions include a fair value gain on investment properties of Rmb700 million.
Yuzhou sold 25% of its share capital in the form of 600 million new shares at a price of HK$2.70. The shares were initially offered in a range between HK$2.79 and HK$3.70. Morgan Stanley was the sole bookrunner.
The final price values the company at 5.2 times its projected earnings for 2010 and at a 50% discount to the net asset value in the same year. On a P/E basis, this makes it even cheaper than Powerlong Real Estate Holdings, which priced its offering 17% below the indicated range a couple of weeks ago for a 2010 price-to-earnings multiple of 6.3 times and a 53% discount to NAV.
Suggestions of tepid demand for some of the listing hopefuls in the property sector are not putting off other issuers, however. In fact, on Monday another residential developer, Longfor, started investor education for a deal that is likely to raise between $800 million and $1 billion. However, the exact size of the deal, currently planned at 20% of the issued share capital, hasn't been firmed up yet and could increase to 25% before the formal roadshow kicks off next Monday.
Longfor stands out from the mainstream Chinese property players by the fact that it is strong in Western China -- an area that is prioritised by the government in terms of development and growth and where there is still massive migration to the main cities. Several of Longfor's projects are in Chongqing and Chengdu, although it is in the process of transforming itself into a nationwide player and also has projects in other parts of China, including Beijing.
Sources also note Longfor's strong brand name and management as key selling points. The company is being brought to market by Citi, Morgan Stanley and UBS.
