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Developers push ahead

Ill winds sweep listings market but mainland property players among those sticking with fundraising plans

PUBLISHED : Monday, 03 June, 2013, 12:00am
UPDATED : Monday, 03 June, 2013, 1:18am

Concern the US Federal Reserve will wind down its bond buying program and the International Monetary Fund's latest warning about mainland government debt are not helping market participants looking to take firms public. But cash-strapped mainland developers are forging ahead with their plans.

Investors are in a cautious mood after Fed chairman Ben Bernanke hinted he might reduce the US central bank's US$85 billion-a-month bond-buying programme. The underlying message was clear: all good things must come to an end.

Meanwhile, the IMF urged the mainland's provincial and city-level governments to be disciplined. The agency's first deputy managing director, David Lipton, warned that headlong investment and rapid credit growth might threaten economic sustainability.

In spite of the mounting headwinds, at least eight initial public offerings remain on track. These include Wuzhou International, a mid-sized mainland property developer, which began a pre-marketing roadshow last week for its proposed US$220 million listing.

Wuzhou International is one of many small mainland developers tapping the market with inexpensive valuations. The Wuxi-based firm plans to sell 1.14 billion shares at an indicative price of between HK$1.18 and HK$1.50 per share. That is a discount to net asset value of up to 70 per cent - a distressed level of pricing that reflects the fact that many listing hopefuls have failed to outline a differentiated business model competitive in the current environment.

Wuzhou's gearing ratio - a measure of a company's financial leverage - rose sharply to 145.9 per cent last year from just 37 per cent in 2010, while its net debt to equity ratio jumped to 100 per cent from 16.9 per cent. These figures suggest that the company's expansion is heavily reliant on debt financing. Its total outstanding bank loans and other borrowings rose to 2.4 billion yuan (HK$3 billion) from 322 million yuan for the same period, according to its listing documents.

Richard Seaward, head of intuitional equities at Sun Hung Kai Financial, said weak investor sentiment meant new listings were required to price at conservative multiples in order ensure a successful debut.

In a sign of the times, Langham Hospitality Investments, a spin-off from Great Eagle Holdings, debuted poorly on Thursday. Its shares tumbled 9.2 per cent to mark the worst performance of an IPO worth more than $500 million in Asia this year. The firm raised HK$4.26 billion after pricing its shares near the midpoint of the range indicated in marketing material.

The benchmark Hang Seng Index has been stuck in range-bound trade between 21,600 and 23,800 points this year, little changed in the first five months of trade.

The lacklustre performance stands in sharp contrast to Japan's Nikkei, which has shot up more than 60 per cent in the past six months, despite a 0.6 per cent correction in May.

Seaward believes the Hong Kong market has reached trough-level valuations that could bode well for the market's outlook in the coming months.

Still, a return of institutional investors to the Hong Kong market was likely only after the market had sustained a rally of at least 10 per cent, Seaward said.

Elsewhere, China Everbright Bank, a mid-sized lender which is already listed in Shanghai, filed an application last week to list in Hong Kong, marking its third attempt.

The Beijing-based bank plans to raise US$2 billion, scaling back its 2011 plan to raise US$6 billion.The long-awaited share sale is expected to get under way in July. The hearing process should be relatively quick as few companies are waiting to list, people familiar with the listing matter said.

Other Hong Kong listing hopefuls include hotel and casino operator Macau Legend, which is seeking a US$600 million share sale.

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