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Attractive valuation may give CIFI offering an edge with investors

With plans to become a top 20 property developer in five years, Shanghai-based firm pitches offering at an attractive discount

PUBLISHED : Wednesday, 14 November, 2012, 12:00am
UPDATED : Wednesday, 14 November, 2012, 3:36am

CIFI Holdings, a Shanghai-based property developer, is pitching its initial public offering to jittery investors by offering attractive valuations amid a listing drought in Hong Kong.

The firm, controlled by three brothers from Fujian, plans to expand and aims to become one of the top 20 property companies by sales in the mainland within five years.

In the face of market uncertainties, investors have been wary of small firms going public partly because they are seen to lack clear objectives and the tools to sell their expansion plans. The shares of a handful of blockbuster IPOs also have fallen well below their offering prices, chipping away at investors' confidence.

With a discount to net asset value of 62 per cent to 69 per cent, the property developer is raising up to US$265 million through a Hong Kong shares launch with a price-earnings ratio of just four times next year's earnings.

Issuers are struggling to go public this year "because of a mix of bad performance and corporate scandals", a veteran banker familiar with the listing process said.

Apart from attractive valuations, CIFI holds a land bank sufficient for future development over the next four years. It holds gross floor area of 5.9 million square metres in the Yangtze River Delta, Bohai Economic Rim, and the Central Western region, according to the firm's listing prospectus.

Founded in 2000 in Shanghai, the property firm is operated by founder Lin Zhon and his younger brothers Lin Wei and Lin Feng. It has projects in 11 cities including Shanghai, Beijing, Chongqing, Tianjin, and Changsha.

CIFI posted a return on equity of 19.1 per cent last year and 24.4 per cent in 2010, compared with its annualised return of 21 per cent for the first half this year.

The above-market return is primarily due to its high turnover strategy and standardised housing, with the average gross floor area ranging from 80 sq metres to 120 sq metres. ROE is a measure of profitability and efficiency.

According to a pre-deal report by Citigroup, the firm is expected to generate a return on equity of 26.1 per cent next year, much higher than the sector average of 15.5 per cent, helped by the balance between sales pace, profitability and financial leverage.

The firm plans to offer 1.3 billion primary shares, about 21.8 per cent of its overall share capital in the IPO. The proceeds will be used to acquire new projects or land in tier-1 or tier-2 cities where it has existing projects.

An extension of property taxes and longer-than-expected purchase restrictions are likely to be the hurdles for property firms.

If everything goes smoothly, the shares could begin trading on November 23.

Following in CIFI's footsteps are at least four listing candidates seeking Hong Kong listings towards the end of the year. Among those hopefuls, PICC, China's largest non-life insurer by premiums, is being closely watched as the deal size might set the benchmark for the year.

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