An elusive IPO

One of Sanxun’s developments

In Chinese folklore the humblest carp became mighty dragons if they swam upstream and leapt over a waterfall on the steepest stretch of the Yellow River.

The saying was said to be an inspiration for people from poorer backgrounds who were taking exams for roles in the imperial bureaucracy (the successful applicants were described as carp that jumped through the dragon’s gate).

The proverb – which also conveys how a sense of how perseverance can bring personal achievement – was being put to work in the media again last week to describe the ambitions of a relatively small real estate firm called Sanxun Holdings.

Like the metaphorical carp, the Anhui-based company has been swimming upstream in submitting four separate applications to IPO on the Hong Kong Stock Exchange since October 2019.

On the previous three occasions, Sanxun let its application lapse, most recently in October last year. But last month it was back again with a new prospectus and updated 2020 financials.

Phoenix News says it’s easy to understand why companies like Sanxun are keen to float in Hong Kong: the capital-raising opportunity in mainland China has been unfavourable to real estate firms for some time, especially for stock fundraisings (see WiC539). And while tier-one property developers like Vanke can raise debt finance at costs in the range of 3% to 5% mark, the interest rate is 10%-plus for smaller developers like Sanxun. That’s why Phoenix News reckons a Hong Kong IPO will provide a fresh source of capital and also a new platform for the company to grow – or a “dragon’s door to soar”.

But Sanxun needs to hurry up as the listing rules in the city are changing at the beginning of July (hence the sudden reactivation of its IPO plans).

Earlier this year, new procedures were flagged that create a clearer distinction between Hong Kong’s main board and its smaller Growth Enterprise Market (GEM).

In particular, minimum net profit requirements for applicant companies have been increased for the main board.

In the interim period, the exchange has acknowledged that a number of smaller companies have struggled to meet their growth forecasts after achieving their market debuts on the bourse.

The suspicion is that some of the forecasts had been reverse-engineered to meet the exchange’s market capitalisation requirements.

In Sanxun’s case there has been a benefit from waiting until now to sell shares in Hong Kong. The company has been able to report a meaningful lift in revenues and profits over the past three years. The former have risen from Rmb723 million ($112 million) in 2018 to Rmb3.95 billion in 2020, while net profit has increased from Rmb45 million to Rmb367.7 million.

Sanxun is an older-style, family-run property developer. Founder Qian Kun, his wife and his father own 95% of the shares between them. It recently moved its headquarters to Shanghai but is still very much a developer with a focus on third and fourth-tier city projects, with much of its business concentrated in Bozhou and Chuzhou in Anhui province.

Sanxun’s timing also seems fortuitous: there has been decent sales momentum across the market as a whole, with a major jump in activity on similar periods last year, when China was first battling Covid-19. House prices are also improving in month-on-month terms in most markets. China Index Academy recently reported that home values rose 0.23% in April across the 100 cities that it tracks, following a 0.2% increase in March. It also told Reuters that tighter restrictions on home purchases in tier-one and tier-two cities mean that some of the demand is flowing into tier-three and tier-four locations – another good signal for Sanxun.

There are a few clouds on the horizon though: this week the Ministry of Finance said it met with the Housing Ministry and the State Taxation Administration to talk about a pilot scheme for implementing a new real estate tax. But if the market momentum keeps moving in Sanxun’s direction, maybe it will get through the ‘dragon’s gate’ at the fourth try.

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