Soho China

Soho China banks on well-known brand to push HK$12.8b offering

PUBLISHED : Tuesday, 18 September, 2007, 12:00am
UPDATED : Tuesday, 18 September, 2007, 12:00am


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Soho China, a Beijing-based commercial property developer, kicked off its international roadshow yesterday in Hong Kong, intent on raising up to HK$12.8 billion in an initial public offering designed to lure investors favouring a mainland property play and attracted by the company's well-known brand.

Soho China is selling a total of 1.54 billion shares, split into two tranches - 1.25 billion primary shares and 299 million secondary shares - at an offer price ranging from HK$6.30 to HK$8.30 each, according to the sale document sent by one of the sponsors. UBS, Goldman Sachs and HSBC are arranging the sale.

The offering represents 31 per cent of Soho China's enlarged share capital - 34 per cent if it exercises the greenshoe option to issue an additional 232.4 million new shares to meet strong demand.

The firm opened the order book for international investors yesterday, and the institutional portion was already about five times oversubscribed by the end of the day, a source from one of the bookrunners said.

'The offering will definitely become a focus in the market, given Soho China's well-known brand name in its home city and the large offering size,' said Cherrie Yan Cheuk-yi, a corporate finance officer at Phillip Securities.

The offering will close on September 27. Trading is expected to begin on October 8.

Soho China changed its business strategy about two years ago, shifting its focus to developing office-retail projects.

'Competition in the residential market is getting fierce and more players are in the market. The market is also negatively affected by the government policy to control property prices,' Pan Shiyi, chairman of the company, said earlier this year.

Soho China first considered a listing more than four years ago, but the plan was dropped because the market at the time would not give them the valuation they wanted and the company was cash-rich from its quick sales turnaround.

The company is tapping a bullish stock market this time, driven by expectations of more money willing to invest in mainland names listed in Hong Kong.

But the timing has also put the company in direct competition with peers who also are selling shares this month, such as Sino-Ocean Land and Aoyuan Corp (Group).

'There are several developers launching public offerings so the margin orders for Soho China may prove to be tight,' Ms Yan said.

Sino-Ocean, a Beijing- and Tianjin-focused property developer that is aiming to raise HK$11.9 billion, drew orders for more than 12 times the shares available for retail investors yesterday, the second day for retail subscriptions.

The strong demand for shares issued by mainland developers is expected to continue to support the Soho China offering, which many investors see as a unique play among its peers already listed on the Hong Kong stock exchange.

'[Soho China] has a pretty special strategy,' said an asset manager attending Soho China's luncheon for institutional investors yesterday. 'They are focusing on high-end commercial projects in Beijing. They also pay attention to projects in Beijing for their future layout.'

Soho China has developed various projects in Beijing's central business district, such as Jianwai Soho, Soho Shangdu and Chaowai Soho with a total planned gross floor area of 1.58 million square metres.

About 20 per cent of its property projects and 33 per cent of its sales are in the capital's central business district, according to the company's website.

'The company and the chairman are very good at promoting themselves in a way that makes them look very unique,' said Francis Lun Sheung-nim, a general manager at Fulbright Securities. 'The company has an edge in building its brand name.'

However, he added: 'The company has sold most of the completed projects and it has only a small land bank. As land prices increase, the company may need a lot of money to compensate for its weakness in land reserves.'

Hong Kong investors, who traditionally value a property developer by gauging whether it has a large land bank, are showing similar concerns.

'The company may continue to have a high profit margin due to its high-quality product, but the company may need more land bank to become a bigger player,' said Kenny Tang Sing-hing, an associate director at Tung Tai Securities.

For Soho China, however, a small land bank seems to be the very result of its development strategy.

'The company is only looking for prime areas in the downtown area to develop high-value-added projects,' said a banker from one of the bookrunners.

'In those areas, it's often difficult to get a large piece of land, but the profitability of such prime projects could be high,' he said.

At present, more than 90 per cent of Soho China's projects are commercial developments and its strategy is to sell them for quick profits. The company prices its projects from 20,000 yuan to 30,000 yuan per square metre.

'[Soho China] has a small capital base given its small land bank, which in turn has a relatively high return on equity ratio,' Mr Tang said.

'Their projects are also pretty special, selling special designs with higher prices.'

What the analysts think

Cherrie Yan,

corporate finance officer, Phillip Securities

Pros: The brand name is famous in Beijing and its focus on commercial properties makes it different from other developers

Cons: The company is not showing strong growth

Francis Lun, general manager, Fulbright Securities

Pros: Soho China has a strong brand name. Its founders and chairman are also well known

Cons: The company may need to spend a lot of money to boost its land bank

Kenny Tang, associate director, Tung Tai Securities

Pros: Its strategy of selling unique designed projects helps generate a high gross margin and a high return on equity

Cons: A lack of sizable land bank and a focus on Beijing may restrain the company's potential to become a nationwide developer