SOHO's Debut Bodes Well for Dozen Chinese IPOs


SOHO China shares rose as much as 23% on their Monday debut after investors flocked to the Chinese developer's US$1.65 billion IPO despite Beijing's efforts to cool the property market.

Investor reaction to the second biggest IPO by a Chinese property firm bodes well for the dozen or more Chinese firms planning to list this year in Hong Kong.

Among the biggest are a $2 billion offering from China Railway Engineering and an IPO worth about $1 billion by business-to-business Web site Alibaba.com.

IPOs by infrastructure and consumption-related firms are the best way to tap China's economy, said Lawrence Lo, vice president at Lombard Odier Darier Hentsche.

The central bank expects Chinese gross domestic product (GDP) to grow 11.6% this year. And many fund managers favor property as a way to hedge against inflation, which is expected to reach 4.6% this year.

"Hong Kong's stock market has reached a record high, and valuations of existing stocks are quite high now," Lo said. "So investing in IPOs is a  relatively good choice."

Alibaba.com begins pre-marketing its IPO this week and China Railway Engineering will follow with a Shanghai and Hong Kong listing. Shipping and logistics firm Sinotrans Group plans a $1 billion IPO and rival North China Shipping Holdings aims to raise $700 million.

Beijing-based SOHO, known for its high-profile husband-and-wife management team, is the latest in a string of developers to skirt a clampdown on bank loans by tapping capital markets to fund growth in a booming property market.

But while the government unveiled more cooling measures last month -- a ban on lending to developers found to be hoarding land and raising the downpayments on second homes -- the retail portion of SOHO's initial public offering was 169 times covered.

Analysts believe bigger developers will flourish as small players crumble under Beijing's cooling steps, which have also included interest rate rises and rules to encourage building of mass housing rather than luxury flats.
Shares Jump

Founded in 1995 by Pan Shiyi and his wife, former Goldman Sachs banker Zhang Xin, SOHO China sold 31 percent of its enlarged share capital in the second try at an IPO. A planned 2003 New York and Hong Kong listing was scrapped amid poor market sentiment.

The 1.549 billion IPO shares were sold at HK$8.30 each -- at the top of an indicated range -- making the deal only slightly smaller than the US$1.66 billion April IPO by another Chinese developer, Country Garden Holdings.

They ended the morning session at HK$9.74, having touched a high of HK$10.20 soon after the market opened, giving the company a market value of about US$6.2 billion.

Recent debutants have performed even better. Country Garden shares jumped 35% on their debut and are trading 150% higher than their IPO price. Fellow developer Sino-Ocean Land jumped 46% on its debut late last month.

On a price-earnings basis, SOHO still looks relatively attractive, trading on Monday at 30.5 times 2007 net profit forecasts, compared to 49 times for Country Garden and 35 times for China Overseas Land and Investment. Chinese banks trade between 20 to 41 times forecast earnings, while insurers trade at more than 40 to 53 times.

"Investors are keen on property IPOs as generally, valuations are lower than retail and financial stocks," said Adam Tam, a fund manager at Pacific Sun Investment Management.

The IPO, arranged by Goldman Sachs, HSBC and UBS, drew several cornerstone investors including the Government of Singapore Investment Corp. Saudi Prince Alwaleed bin Talal was also planning to buy a stake.

But some fund managers were put off by SOHO's dependence on Beijing's hot property market. The firm's flagship project in the last few years is SOHO New Town, a brightly colored, modernist office and apartment complex that rises from a grey industrial zone on the outskirts of Beijing's flowering commercial district.