Poly Real Estate Group Co, one of China's top State-owned real estate firms, will accept public online subscriptions for its initial public offering (IPO) from today after the allocation of shares to institutional investors wrapped up last week.

 

Poly is expected to list on the Shanghai Stock Exchange before August 3. The performance of its shares will be closely watched by investors for potential impact on real estate counters; only six or seven companies have been allowed to list since 2000.

 

The Poly listing could pave the way for other capital-starved real estate companies to follow, analysts said. They said Poly's move underlines the importance of the capital market for the real estate sector at a time when interest rates are rising and banks have restrained their lending to the property sector in response to the government's cooling-off measures.

 

Poly plans to issue 150 million shares accounting for 27.27 percent of its total equity stake at 13.95 yuan (US$1.74) per share. Proceeds of around 2 billion yuan (US$250 million) will be used to finance and repay debts for two real estate projects in Guangzhou and one in Chongqing, the company said in its prospectus.

 

The company's debt ratio has sustained high levels, 85 percent for 2005 and an average of 80 percent for the past three years, according its financial statements. By comparison, the average industry ratio is around 70 percent and better performers are 65 percent, said analysts.

 

"As a fast-growing company, Poly resorts to high leverage and yet its financials are solid and capacity to repay debt is high," said Zhang Luan, a stock analyst with Haitong Securities.

 

Poly's net profit in the past three years has been growing at a rate of 141 percent on the strength of its core business, real estate sales, to reach 406.85 million yuan (US$50.86 million) in 2005, or 1.02 yuan (13 US cents) per share. The company's net profit is set to grow at around 30 percent in the years ahead, predicted analysts.

 

Most analysts take a favorable view of Poly's upcoming listing and its stock performance afterwards as it is rich in land resources, a vital factor for any real estate firm.

 

The Guangzhou-based company now has land reserves of 9.36 million square meters in 10 major cities in the country. Forty percent of its land is located in first-tier cities like Beijing, Shanghai and Guangzhou, said Liu Ping, the company's deputy general manager, yesterday.

 

The company will focus on projects in first-tier cities in the coming years as it seeks to expand into fast-growing second-tier cities such as Wuhan, Shenyang and Chongqing, said Liu.

 

The property sector in China has been booming in the past years as demand for apartments, offices and shopping malls increases, fuelled by rising incomes and rapid economic growth.

 

Riding on surging demand for capital, a slew of property developers have sought share offerings recently. Shimao Property, a Shanghai-based property developer, raised HK$3.72 billion (US$479 million) in a Hong Kong IPO on July 5.

 

Other property firms listed on the mainland markets have also expressed a desire to finance on the capital market through private placement. China Vanke Co, the largest mainland-listed property firm, and Nanjing Chixia Development Co are said to have filed applications.

 

"For good quality listed property firms with abundant capital flow and financing channels, the government's cooling-off policies and further interest rate rise have had little influence," said Hu Jia, a consultant with Shanghai-based Deding Investment Consulting Co.

 

China stepped up efforts to cool the property sector in May by restricting land for expensive housing and imposing a capital-gains tax on the sale of second-hand homes. The central bank also raised loan rates and down payments for mortgages to restrict bank lending to the sector.

 

But the government's latest interpretation of a 90 square-meter apartment rule was viewed as positive by the real estate sector and pushed up real estate stocks in the past days.

 

The central government announced in late May that local governments should ensure that 70 percent of all units approved for construction after June 1 are no larger than 90 square meters. Last week the Ministry of Construction said the 70 percent rule applies to the total development of a particular area rather than to single projects.

 

(China Daily July 19, 2006)