Mainland developer Modern Land (China) has taken a calculated risk with the launch of an initial public offering in Hong Kong amid deteriorating prospects for the global equity market.
Some analysts said the timing of the IPO reflects the company's desperation to raise cash even in a difficult market. Others believe it is making a strategic move to obtain a listing and avoid possible difficulties in securing bank loans amid an imminent credit crunch.
Modern Land aims to raise between HK$593 million and HK$944 million by offering its new shares at an indicative price range of between HK$1.49 and HK$2.36 each. The issue price represents a price-earnings ratio of between 3.5 times and 5.6 times.
"It is a rare move to offer such a low valuation and it indicates it is cash hungry," said Castor Pang, the head of research at Core Pacific-Yamaichi. If Modern Land insisted on pushing through with the IPO, he said it had no choice but to offer its assets at a steep discount.
According to the company's listing prospectus, with the difficulties in obtaining bank loans as a result of the austerity measures recently imposed on the mainland property market it had turned to non-bank financial institutions.
In March, the firm raised a two-year, 200 million yuan (HK$250.3 million) loan from Zhong Cheng Trust at an annual interest rate of 12.8 per cent, compared with rates of about 6 per cent at the main banks. The funds were specifically for funding the development of phase three of Wan Guo Gheng MOMA in Taiyuan, Shanxi province. Its total bank borrowings amounted to 935 million yuan on April 30.
Alfred Lau, a property analyst at Bocom International, believes the firm hopes to use the listing status as a platform to tap the international debt market in light of the tightening lending policy on the mainland. "A listed firm will enjoy lower costs of funding and it will be easier to secure financing," he said.
Modern Land plans to sell 400 million shares at a steep discount of 66 per cent to 78 per cent, depending on the pricing. It said the proceeds would finance the land premium and development cost for sites in Beijing and Nanchang. The shares will be open for public subscription from today and will close on July 4. They will begin trading on July 12.
The developer has 14 property projects on the mainland at various stages of development, including a total gross floor of 1.79 million square metres of completed projects and a further 2.23 million square metres under development. Seven projects are in Beijing, with the rest in Taiyuan; Changsha, Hunan; Nanchang, Jiangxi; and Xiantao, Hubei.
In December last year, Modern Land paid US$4.55 million for a 196,155 square metre site in Pearland, Texas, for future development. The firm planned to develop a senior-living community on the site. For the year to December 31, its net profit rose 7.3 per cent to 478.36 million yuan, from 443.71 million yuan in 2011.
It is the second mainland property firm to launch an IPO this week, after New Century Real Estate Investment Trust, the world's first China-based hotel reit. New Century REIT aims to sell 469.91 million units in a price range of HK$3.50 to HK$4.20 per unit and expects to raise between HK$1.64 billion and HK$1.97 billion to finance hotel purchases The yield could range between 6.5 and 7.8 per cent this year, depending on the offer price.