A leading landlord

Will Wanda’s IPO make it China’s most valuable real estate firm?

Wang Jianlin, chairman of Chinese property developer Dalian Wanda Group, answers a question in Qingdao

Showtime: Wang has been busy with interviews ahead of Wanda’s IPO

Two months ago, he lost his crown as China’s richest man. But Dalian Wanda’s Wang Jianlin hopes to regain some lustre later this month by completing Hong Kong’s largest IPO of the year.

Slipping down the Forbes China rankings to fourth place may also prove to be a blessing in disguise for the property tycoon, even if he may have been chagrined to cede the top spot to Alibaba’s Jack Ma.

Wang dropped from first to fourth place because of a downturn in the property sector. But conversely, the $3.23 billion to $3.84 billion listing of his main vehicle Dalian Wanda Commercial Properties is likely to be a great success if investors believe the downturn has run its course and they can ride the renewed momentum in the sector.

The latest figures from China Real Estate Index System provide glimmers of hope. These show that while prices for new homes dropped 0.38% in November (the seventh consecutive month-on-month decline), the downturn was less marked than October’s 0.4% and September’s 0.9%.

The most notable signs of an upturn came in first-tier cities, where sales by gross floor area were up by 12% both month-on-month and year-on-year. However, the overall figures were let down by smaller cities where sales in gross floor area were up 1% month-on-month, but down 15% year-on-year.

Two key decisions have put the sector back on a firmer footing. At the end of September, the government gave real estate developers a boost after announcing that homebuyers who have paid off their existing mortgages can buy a new property at the same interest rates as first time buyers.

Then in mid-November, the People’s Bank of China cut interest rates for the first time in two years, providing a spur for the market. The reaction of stock market investors to the rate cut was instantaneous. China Vanke had risen 32% by December 8, while China Overseas Land and Investment (COLI) was up 15% in the same timeframe.

This means that Wanda’s offering may have arrived at just the right time.

At current levels, the property sector is trading on a forward price-to-earnings ratio of 5.9 times compared to its historical average of around 9.1 times. However, leading developers such as China Vanke and COLI are both trading near these levels, with the former currently valued at nine times 2014 earnings and the latter at 8.3 times.

So how does Wanda compare with Vanke and COLI, the biggest developers by market value listed in China and Hong Kong respectively?

Both property heavyweights are on course to record higher revenues than Wanda this year. Analysts have a consensus forecast of about Rmb150 billion ($25 billion) for Vanke and Rmb102 billion for COLI. Wanda, on the other hand, is unlikely to hit last year’s Rmb86.8 billion figure having recorded revenues of Rmb23 billion during the first half of the year. However, it claims to be much more profitable than its peers. In its IPO prospectus Wanda says net profit will top Rmb24 billion for 2014 as a whole. By contract, analysts expect Vanke to come in around the Rmb17 billion mark and Rmb23 billion for COLI.

Wanda is being pitched at a lower valuation than both Vanke and COLI. This is partly because IPOs are priced at a discount to fair value – i.e. where analysts believe they will trade in the secondary markets. But it is also a sign of the need to get such a large amount of stock sold at a time when views about the sector remain decidedly mixed.

The company’s 600 million new share deal is being marketed on a price range of HK$41.8 ($5.37) to HK$49.6 per share, which equates to 6.17 to 7.13 times estimated 2014 earnings. A group of 11 cornerstones have already signed up for 56% of the base deal.

Should the company exercise its greenshoe, which also comprises all new shares, total proceeds could amount to $4.4 billion. As a result, Wanda’s prospective market capitalisation could span $24 billion at the bottom end of the price range (pre-greenshoe) to $29 billion at the top end of the range (post-greenshoe). This compares with COLI’s current market value of $24 billion and Vanke’s $21 billion.

The proceeds will be used to finance 10 new developments. The new equity will also bring down the company’s leverage, which has been trending higher since 2011 and stood at 87.8% at the end of the first half. This is also notably higher than both China Vanke and COLI, which have respective gearing ratios of 31.4% and 29.6%.

Wang’s global ambitions, however, mean that Wanda has been growing an international exposure which sets it apart from Vanke and COLI. Wang has predicted that by 2015 Wanda will outgrow the world’s largest property developer, Simon Property Group, in terms of asset size. Indeed, the company’s global footprint has expanded quickly over the past two years to embrace the UK, the US, Spain and Australia.

The group’s $1.65 billion investments in the UK include its landmark Nine Elms development in London, while its American plans include a development close to Los Angeles’ famous shopping strip Rodeo Drive. By 2015, Wang aims to have an international portfolio of 25 million square metres.

The group’s current Chinese portfolio comprises 175 property assets in 111 cities across 29 provinces and with a gross floor area of 85 million square metres. This includes 159 Wanda Plazas, six Wanda Cities and 10 other projects. It also has 48 hotels, making it China’s largest luxury hotel owner.

The Wanda Plazas have historically been the bedrock of the group’s profitability and were refashioned in 2006 to offer a more integrated experience spanning shopping, residential and office blocks. But in 2013 the group began to switch focus to the multi-phase, cultural-tourism property projects known as Wanda Cities.

Wang has made it clear this is where he believes the group’s future lies. As the billionaire tells CBN: “The future revenues of the cultural industry may not generate the highest revenues at Wanda, but they are now at the forefront of my mind.” Wang wants to be a movie mogul as well as a developer and the Wanda Cities embrace both ambitions.

In Qingdao he is building what the company has dubbed the oriental Hollywood by the sea – an $8.1 billion project encompassing a movie museum and 20 studios. Other Wanda Cities include shopping, dining, entertainment and sightseeing: they are in Nanchang (inspired by the famous blue and white Ming porcelain fired close to the area); in Wuhan (evoking early twentieth century Chu culture); in Hefei (Hui style architecture on the banks of Chao Lake); in Harbin (trading on the famous ice festival) and in Wuxi (where he’s constructing China’s answer to Disneyland).

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