Property developers turn to HK for IPO

Tight regulation on mainland force firms to look elsewhere for capital

Mainland developers raised more than 10 billion yuan ($1.6 billion) in the overseas market in October and at least five of them are seeking to use initial public offerings to raise more than $2 billion and be listed on the Hong Kong Stock Exchange by the end of 2012.

The China Securities Regulatory Commission, as part of the government's effort to cool the overheated property market, has not approved a property developer's plan for a listing on the Chinese mainland's A-share market since 2007.

Many investors have said the large number of IPOs seen in the past drained away investment capital and drove the stock market into the doldrums.

With the freeze on approvals, many cash-starved property companies have turned to other markets to raise capital. The greater enthusiasm for listing in Hong Kong has in large part been "stoked by mainland regulators' comments about lowering the requirements for mainland companies that are seeking a Hong Kong listing", said Wang Jianhui, chief economist with Southwest Securities Co Ltd.

According to current regulations, mainland developers must have a minimum of 400 million yuan in net assets and 60 million yuan in annual net profits to be listed in Hong Kong. They also must be capable of raising a minimum of 50 million yuan.

The CSRC, the country's top securities regulator, said on Friday that it is considering reducing or removing some of these requirements.

Various property developers, including the Shanghai-based CIFI Group Ltd and Jiangsu Xincheng Real Estate Co Ltd, are planning to hold IPOs in Hong Kong.

On Sunday, CIFI Group announced that its price per share on the Hong Kong exchange will be between HK$1.33 and HK$1.65 ($0.17 and $0.21), and it will raise between $220 million and $270 million in its initial public offering.

The average price-to-earnings ratio for CIFI Group, based on the company's performance in 2012, will be between 3.5 and 4.3. Among mainland property A shares that are listed on the Shanghai bourse, the average price-to-earnings ratio is 6.

Analysts said the low issuance prices that are commonly seen in Hong Kong have proved attractive to investors. Since the second half of 2008, the average price-to-earnings ratio of domestic property developers that have been listed in Hong Kong has been 5.8. The limits placed on home purchases in the mainland have also made it more risky to invest in such shares.

The low issuance prices will also give property developers more opportunities to expand, said an investment bank source quoted by the Securities Daily.

Mainland property developers are seeking to go public in Hong Kong as the property market and macroeconomic policies become more stable, said Hui Jianqiang, research director of Beijing Zhongfangyanxie Technology Service Ltd.

In the third quarter, large Chinese developers posted stronger earnings.

In the first three quarters of 2012, China Vanke Co Ltd generated 5.08 billion yuan in net profits, up 41.74 percent year-on-year.

Analysts predicted the country's largest property developer by market value will have a record amount of revenue in 2012.