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Sunday, 13 July 2014

First Sponsor Group Limited

First Sponsor Group Limited ("FSG" or the "Company") is offering 3m shares for the public and 30.25m shares via placement at $1.50 each for its IPO. The offer will end on 17 July 2014 at 12pm and starts trading on 22 July at 9am.

It was priced at the lowest end of its book building range according to the Company's term sheet. The market cap will be around $884.7m based on the IPO price.

Principal Activities

The Company is a developer and owner of residential and commercial properties in PRC and is backed by 2 key controlling shareholders, Hong Leong Group Singapore (through Millennium & Copthorne Hotels Plc) and Tai tak Estate Sendirian Berhad. 

The Company operates in 2 key cities of Chengdu and Dongguan and the picture below will show you all their projects (current and future) at one glance.

Financial Performance

It is frankly difficult to predict what the future profitability will look like given this is a property development company and much depends on how successful they are in bidding for the projects and executing them.

The EPS based on the post-invitation shares is 8.14 cents. This translate into a PER of around 18.4x, which is not exactly good value. I am not privy to the 2014 results, so at this juncture, it is very difficult to determine how the forward earnings will look like given the lumpiness of such business nature.

As you can see from the table above, much of the revenue is generated by the sale of properties.

Strategies and Future Plans

The main bulk of the IPO proceeds is for future development projects and the table below shows its strategies and long term plan.

What i like about the Company
  • Strong sponsorship. The two major holders are reputable companies, especially the Hong Leong Group. 
  • Focus on 2nd tier cities and mass market segments, where the supposedly growth will come
  • The Company has been very high cash flow generative and has no long term debt at this juncture. Much of the capital requirement has been provided by the sponsor on an interest free basis
  • It is sold at 25% discount to its book value
  • Managed to attract Tecity as a cornerstone investor
  • Committed to pay out some dividends every year
My concerns
  • China property sector has been in the doldrums for a while now. It remains to be seen if recovery is on the cards
  • Overly concentrated on only two cities. 
  • Complicated shareholding structure with a cross holdings by other companies within the Hong Leong group.

The Company intends to pay out $10m a year (or 1.695 cents) for now. Based on the IPO price and shares, that works about to be about 1.13% yield. 

My ratings

The Company is listed at a slight premium. The post IPO NAV is around $1.42 versus the IPO price of $1.50 The fact that it is priced at the lower end of the book building range is not encouraging. However, having said that, the adjusted NAV based on the appraised valuation is around $1.99. So investors are effectively getting in at a discount of around 24.8% to its value appraised by DTZ.

I present the peers valuation table from Capital IQ below. I did not attempt to remove the bigger market cap companies as technically, the smaller one should be trading at a discount.

Given that i am not sure of the forward earnings, i will use the book value as a benchmark. From the table above, a range of 0.7x (median) to 0.8x (mean) would be a fair value range and that will translate into a price of between $1.40 to $1.60. As for PE benchmark, i think First Sponsor Group is already fairly valued.

Personally, i am not so keen into property counters right now, especially the ones in China. You can see that there are better valued companies for you to choose. I will give it a 1 Chilli rating, i.e. subscribe only if you like the company and the sector. The float is pretty small and very well-controlled. The Company is cash rich and don't really need to do the IPO, so this exercise is probably more for strategic reasons. Given that they have placed out the shares pretty well and this is a Hong Leong related company, i think downside will be limited but I will frankly be surprise to see much first day fireworks as well. The rich tycoons are too shrewd to sell you anything cheaply.

As there is only 3m public shares available, it is probably not going to be easy to get the shares. Having said that you will also need to hold a longer term view when you press the apply button as you will have to sit out the property cycle doldrums.

Happy IPOing.


Anonymous said...

Ipo underwrite by UOB usually cheong.what is your view? Mr ipo

Anonymous said...

Mr ipo allocated any lots from placement tranche?

Mr. IPO said...

UOB underwrite dont usually mean cheong lah....

Was allocated 1 lot which i rejected.... keke

Anonymous said...

1 lot?? Ha, difficult to even earn back comm??

Will u be applying with the view to flip?

Mr. IPO said...

Probably not. I am not sure if worth the efforts.

Anonymous said...

Hi MR IPO, would u have an analysis of the balloting results?

Looks quite bad to me in terms of response... i kena 8 lots... sianz

Mr. IPO said...

The sgx website under maintenance. Will take a look later but my gut feel think it should be fine.

Anonymous said...

totally late comment. concerns as follows. 1) lots of hk based china properties doing spinoffs and ipos these days. in general the net gearing is north of a hundred percent so you feel the squeeze. this company is net cash, if you treat the property financing loans as excess cash thats even more cash. why list if you have room to bid land alone ? 2. property financing loans at eighteen percent return is all cool - only if you assume it is default free. if the ipo cash is not to be redeployed for land bids but for more entrusted loans, then this is not a property ipo this is a pseudo bank ipo. is this what you actually want ? remember banks seldom loose money on just the interest usually the lose comes in a lumpy way when debts default. 3. twin city story of dongguan and chengdu? integrated developments? issue with chengdu is this is where the chunk of oversupply is, issue with integrated developments is low turn of inventory. in this sense first sponsor is akeen to some of the other property ipos in hong kong these days they are all sizable but low turn developments. a company like guangzhou r and f will easily be able to bid land pre sale and deliver the properties for close to 24 months, not for integrated development property companies. a like for like ROCE number puts first sponsor at four percent, mainstream developers can hit eight nine or even ten. to me all in all it looks like the parent really is just trying to offload the low return stuff from M&Cs balance sheet.two cents worth here didnt study it systematically, just a fast and dirty view

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