A number of mainland companies are launching initial public offerings in Hong Kong after Xiaomi’s listing.
E-house (China) Enterprise Holdings, a leading real estate service firm, plans to list in the city with a proposed valuation of US$3.1 billion to US$3.5 billion.
The company has the support of several heavyweights, including e-commerce giant Alibaba and 26 Chinese property developers such as Vanke, Evergrande and Country Garden. It intends to raise HK$7 billion from the share offering.
E-house is the dominant player in China’s primary housing market. Founder Zhou Xin owns 26 percent of the company, while the nation’s top three developers – Vanke, Evergrande and Country Garden – each owns a 15 percent stake. Twenty-three other Chinese developers own smaller shares ranging from 0.5 percent to 2 percent.
All these developers are the main customers of E-house.
Cornerstone investors include subsidiaries of Alibaba Group, Chinese state-owned developer Overseas Chinese Town (Asia), the Singapore-based property and hotel conglomerate City Developments, and a firm controlled by Henderson Land Development vice-chairman Peter Lee Ka-kit.
Alibaba has paid US$50 million for a 1.5 percent stake in the company, while Lee paid HK$300 million for 1.1 percent stake.
The proposed valuation represents a price-earnings multiple of nine times, which seems quite reasonable for a leading real estate service company in China. However, the industry is extremely competitive, and E-house has just a very marginal advantage over its big rivals in the sector.
Last year E-house reported a revenue at 4.6 billion yuan (US$690.6 million) and a net profitof 970 million yuan. Therefore, a market value of HK$24.2 billion to HK$27.3 billion would be equivalent to forward P/E of 8.5 to 9.7 times.
The company says it is the largest real estate agent in China’s primary housing market, citing third-party data, although it did not disclose its actual market share.
E-house earned 3.93 billion yuan from its primary market services last year, covering 186 Chinese cities.
By contrast, the second-largest player reported 3.82 billion yuan of revenue from 185 cities last year, while the third-largest player earned 2.93 billion yuan from 150 cities.
As such, the top three players don’t differ much in business scale.
Apart from having offline outlets, the company also has strong online services. Its research subsidiary CRIC is the nation’s largest real estate research institute.
Market insiders note that there is actually no dominant real estate agency in the country. The market is highly fragmented, although there are many powerful local players in second-tier and even smaller cities.
That being the case, E-house may have a 10 to 20 percent share of the entire mainland market.
Lianjia, China’s largest secondary property site, has already tapped into the primary market, making it a direct competitor of E-house. E-house is also trying to expand into the secondary market.
Generally speaking, the market leader of an industry enjoys a valuation premium, as its market dominance points to the excellent quality of its operations. Also as a result of its leading market position, the firm will benefit from economies of scale and a high level of customer inertia.
But the valuation premium only lasts as long as the firm can cement its leading market position. To prove to investors that it deserves the premium, E-house must further strengthen its leading position.
The full article appeared in the Hong Kong Economic Journal on July 11
Translation by Julie Zhu
[Chinese version 中文版]
– Contact us at [email protected]