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Breakingviews: China property IPO bets on big name to calm fears

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A woman points at the model of a residential compound by China Vanke as a sales agent introduces the property to the visitors at its showroom during the National Day “Golden Week” holiday, in Dongguan, Guangdong province, China October 2, 2018. REUTERS/ Stringer

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HONG KONG, Sept 22 (Reuters Breakingviews) – Big names generate deal interest, but that comes with risks, too. China Vanke (000002.SZ), the largest private developer by market value in the People’s Republic, is braving both rocky stock markets and the implosion of the mainland real estate sector to spin off its services unit at a valuation of almost $8 billion. That’s well below an earlier price tag, but it is still asking a premium to many peers.

At the top of the price range, residential and commercial property manager Onewo will raise about $790 million in what will be Hong Kong’s biggest initial public offering. A funding round last year valued the group at about $14 billion, per financial publication IFR. Two years ago, similar floats were commanding valuations of up to 27 times expected earnings. Those were better times: a Hong Kong index for the sector has dropped 72% since then.

Onewo will be valued at 17 times 2023 earnings according to IFR, roughly in line with the average of its peers. Look more closely though, and there’s a big split between state-backed firms trading on up to 30 times, and private rivals like Country Garden’s unit on 8 times.

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The pitch for property managers has been sticky revenue — someone has to keep emptying the bins — with titillating talk of fast-growing technology offerings. Onewo follows this pattern with its high-tech unit generating less than 10% of sales. Perhaps that’s why it dropped “Space-Tech” from its official name since its first filing.

More pertinent to its profit however, are the swings in profitability depending on Onewo’s customers. Last year it made a gross margin of 16% overseeing residential properties for its parent, but 4% working for others. For commercial properties, the margins were 20% and 12% respectively. It attributes the gap to $28 billion Vanke’s brand and quality, and the set-up costs for new third-party work. Unless Vanke goes on a building tear again, it’s hard to see Onewo maintaining anything like its recent 28% net profit growth.

Parent Vanke will take some comfort however from other recent listings in Hong Kong. Duty-free operator China Tourism Group (601888.SS), raised $2.1 billion last month, and its shares have risen 13% since, outpacing the wider market. Even so, Onewo doesn’t seem to be making much concession to the tough conditions it faces. In soft markets, that’s a risky ask.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

China Vanke is spinning off its property management unit Onewo in a Hong Kong initial public offering that could raise up to $790 million and value the business at almost $8 billion.

At the top end of its price range, at HK$52.7 per share, the deal would value Onewo at 24 times 2022 expected net profits, and 17 times its forecast 2023 numbers, according to financial publication IFR.

The float comes as the mainland property sector is dealing with a cash crunch and a loss of confidence that has led several developers to default with more expected to do so.

Vanke is the latest in a long line of its peers to raise funds from its services business, which looks after residential and commercial properties.

Onewo is expected to start trading on Sept. 29.

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Editing by Robyn Mak and Thomas Shum

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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