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Saturday 24 October 2009
Mainland developers in IPO rush amid signs market losing appetite
It is a US$6 billion cash grab. That is the combined amount of money eight mainland property developers have either just raised or are planning to generate on the Hong Kong stock market.
Mainland developers in IPO rush amid signs market losing appetite
Naomi Rovnick 19 October 2009
It is a US$6 billion cash grab. That is the combined amount of money eight mainland property developers have either just raised or are planning to generate on the Hong Kong stock market.
Three of them - Shenzhen developer Excellence Real Estate Group, Guangzhou-based Evergrande Real Estate Group and Fujian’s Yuzhou Properties - are planning stock market fund-raisings in coming weeks. Later, Longfor Group of Beijing, Mingfa Group, another Fujian developer, and Fantasia Group of Shenzhen will try their luck.
“This is opportunistic,” says Fitch Ratings analyst Michael Wu, referring to currently high Hong Kong share prices that are making it attractive for company owners to list their businesses. “No one knows how long the [initial public offering] window will stay open.”
But the wheels of the gravy train could fall off even though it is barely out of the station.
The share offer of mainland developer Evergrande, a deal planned for early November, has faltered. The company’s investment bankers were valuing the developer at up to HK$76 billion until last week, reflecting a discount to net asset value of as much as 35 per cent.
But after pricing negotiations over the weekend, the bankers cut Evergrande’s expected market value to a range of HK$45 billion to HK$60 billion, according to an investor memo that was circulated late last night.
This means the firm’s stock market valuation on its first day of trading could be 56 per cent lower than the value of its properties. Evergrande’s fund-raising goal remains the same, however, with the developer seeking up to US$897 million from the deal.
Investors are already weary of mainland high-risk property developers, which in some cases have cut the asking prices for their shares or scaled back their fund-raising goals to make their initial offerings happen and secure their founders’ dreams of zooming up the rich lists.
“We are just getting bored of mainland property stocks,” said one hedge fund manager. “There are enough of them already on the market, so funds already have exposure.”
Shanghai developer Glorious Property made its market debut on October 2, raising US$1.28 billion in a deal that valued founder Zhang Zhirong’s 66 per cent stake at almost US$3 billion. But Glorious shares sank 20 per cent on the first day of trading. They languished at HK$3.09 on Friday, 13 per cent below their offer price.
Days later, Powerlong Real Estate Holdings, a Fujian developer, scaled back the size of its share offer to US$353 million from US$628 million. Its shares opened at HK$2.75 on Wednesday and, because the company had chopped the asking price substantially, inched up to HK$2.80 by the end of the opening day.
The bosses of the yet-to-list developers must be biting their fingernails.
Evergrande chairman Hui Ka-yan owns 67.5 per cent of the company. So he stands to become stupendously rich, at least on paper, if the share offer succeeds.
Some investors expect most of the property share sales to happen, as long as the valuations are low enough.
But others say mainland property companies are unattractive investments because they are high-risk. When they are selling lots of new homes, the developers rake in cash, but when the property market turns down, these firms cannot make money. They have very short cash cycles. They borrow money from banks, spend it on building projects and hope enough buyers will buy the flats in advance so they can repay debts and plough funds into new construction.
“This business model is a big contrast to the large Hong Kong developers, which have substantial and reliable rental incomes from corporate tenants to see them through the bad times,” said Wu.
Take Yuzhou Properties, which is hoping to raise US$286 million to fund property development in Xiamen, an area of Fujian province that could boom from extending its ties with nearby Taiwan.
The developer’s home base may be set to thrive, but its business model is simply a bet that homebuyers will continually purchase more properties in any given year than they did the year before.
In its pre-offering prospectus, Yuzhou says that in the future, home sales will account for 90 per cent of its income, with rental income at 10 per cent. “Reduced cash flow from pre-sales of our properties will increase our reliance on external financing,” Yuzhou admits in its prospectus.
Its borrowings are already substantial - it has 1.3 billion yuan (HK$1.48 billion) of debt, compared with 1.9 billion yuan of net assets.
However, at the moment, many mainland developers are making hay. As Beijing continues to crank out cash to stimulate the economy, banks are lending freely, and much of this money is being spent by consumers on new homes.
One of Evergrande’s financial advisers, BOC International Holdings, expects the Guangzhou developer’s sales to hit 43 billion yuan next year, a huge leap from 5.3 billion yuan this year, according to a pre-offering research note.
But when economic conditions are not good, mainland developers that are reliant on continually selling new homes for income can struggle.
Evergrande tried and failed to raise US$2 billion on the Hong Kong stock exchange in March last year. From late 2007, Beijing had constrained state banks from making property loans, and investors were afraid the situation could get worse. Evergrande’s net profit fell from more than one billion yuan in 2007 to 525 million yuan in 2008 last year, the BOCI research shows.
Without steady incomes from rentals, mainland developers can be forced to gobble up debt.
Evergrande borrowed more than US$800 million from Wall Street banks and private equity funds in 2006.
After its listing attempt failed in March, it sold shares to investors including New World Development chairman Cheng Yu-tung, for US$502 million.
The BOCI research shows Evergrande’s loans are now manageable. As of June 30, it had 10 billion yuan of borrowings, against 88 billion yuan of net assets. By next year, the developer could be debt-free.
2 comments:
Mainland developers in IPO rush amid signs market losing appetite
Naomi Rovnick
19 October 2009
It is a US$6 billion cash grab. That is the combined amount of money eight mainland property developers have either just raised or are planning to generate on the Hong Kong stock market.
Three of them - Shenzhen developer Excellence Real Estate Group, Guangzhou-based Evergrande Real Estate Group and Fujian’s Yuzhou Properties - are planning stock market fund-raisings in coming weeks. Later, Longfor Group of Beijing, Mingfa Group, another Fujian developer, and Fantasia Group of Shenzhen will try their luck.
“This is opportunistic,” says Fitch Ratings analyst Michael Wu, referring to currently high Hong Kong share prices that are making it attractive for company owners to list their businesses. “No one knows how long the [initial public offering] window will stay open.”
But the wheels of the gravy train could fall off even though it is barely out of the station.
The share offer of mainland developer Evergrande, a deal planned for early November, has faltered. The company’s investment bankers were valuing the developer at up to HK$76 billion until last week, reflecting a discount to net asset value of as much as 35 per cent.
But after pricing negotiations over the weekend, the bankers cut Evergrande’s expected market value to a range of HK$45 billion to HK$60 billion, according to an investor memo that was circulated late last night.
This means the firm’s stock market valuation on its first day of trading could be 56 per cent lower than the value of its properties. Evergrande’s fund-raising goal remains the same, however, with the developer seeking up to US$897 million from the deal.
Investors are already weary of mainland high-risk property developers, which in some cases have cut the asking prices for their shares or scaled back their fund-raising goals to make their initial offerings happen and secure their founders’ dreams of zooming up the rich lists.
“We are just getting bored of mainland property stocks,” said one hedge fund manager. “There are enough of them already on the market, so funds already have exposure.”
Shanghai developer Glorious Property made its market debut on October 2, raising US$1.28 billion in a deal that valued founder Zhang Zhirong’s 66 per cent stake at almost US$3 billion. But Glorious shares sank 20 per cent on the first day of trading. They languished at HK$3.09 on Friday, 13 per cent below their offer price.
Days later, Powerlong Real Estate Holdings, a Fujian developer, scaled back the size of its share offer to US$353 million from US$628 million. Its shares opened at HK$2.75 on Wednesday and, because the company had chopped the asking price substantially, inched up to HK$2.80 by the end of the opening day.
The bosses of the yet-to-list developers must be biting their fingernails.
Evergrande chairman Hui Ka-yan owns 67.5 per cent of the company. So he stands to become stupendously rich, at least on paper, if the share offer succeeds.
Some investors expect most of the property share sales to happen, as long as the valuations are low enough.
But others say mainland property companies are unattractive investments because they are high-risk. When they are selling lots of new homes, the developers rake in cash, but when the property market turns down, these firms cannot make money. They have very short cash cycles. They borrow money from banks, spend it on building projects and hope enough buyers will buy the flats in advance so they can repay debts and plough funds into new construction.
“This business model is a big contrast to the large Hong Kong developers, which have substantial and reliable rental incomes from corporate tenants to see them through the bad times,” said Wu.
Take Yuzhou Properties, which is hoping to raise US$286 million to fund property development in Xiamen, an area of Fujian province that could boom from extending its ties with nearby Taiwan.
The developer’s home base may be set to thrive, but its business model is simply a bet that homebuyers will continually purchase more properties in any given year than they did the year before.
In its pre-offering prospectus, Yuzhou says that in the future, home sales will account for 90 per cent of its income, with rental income at 10 per cent. “Reduced cash flow from pre-sales of our properties will increase our reliance on external financing,” Yuzhou admits in its prospectus.
Its borrowings are already substantial - it has 1.3 billion yuan (HK$1.48 billion) of debt, compared with 1.9 billion yuan of net assets.
However, at the moment, many mainland developers are making hay. As Beijing continues to crank out cash to stimulate the economy, banks are lending freely, and much of this money is being spent by consumers on new homes.
One of Evergrande’s financial advisers, BOC International Holdings, expects the Guangzhou developer’s sales to hit 43 billion yuan next year, a huge leap from 5.3 billion yuan this year, according to a pre-offering research note.
But when economic conditions are not good, mainland developers that are reliant on continually selling new homes for income can struggle.
Evergrande tried and failed to raise US$2 billion on the Hong Kong stock exchange in March last year. From late 2007, Beijing had constrained state banks from making property loans, and investors were afraid the situation could get worse. Evergrande’s net profit fell from more than one billion yuan in 2007 to 525 million yuan in 2008 last year, the BOCI research shows.
Without steady incomes from rentals, mainland developers can be forced to gobble up debt.
Evergrande borrowed more than US$800 million from Wall Street banks and private equity funds in 2006.
After its listing attempt failed in March, it sold shares to investors including New World Development chairman Cheng Yu-tung, for US$502 million.
The BOCI research shows Evergrande’s loans are now manageable. As of June 30, it had 10 billion yuan of borrowings, against 88 billion yuan of net assets. By next year, the developer could be debt-free.
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