China New Town IPO.

Closing date of application: 12 November 2007
Commencement of trading: 14 November 2007

Established in 2002, China New Town is a leading PRC-based new town developer and is a subsidiary of its parent Hong Kong listed property develop Shanghai Real Estate Group. They work closely with local governments to plan and develop large scale new town projects of at least 5mil sqm that are located in the suburbs of China's major cities.

They are currently developing 3 projects, namely:

• Shanghai Luodian New Town Project
• Wuxi Hongshan New Town Project
  
• Shenyang Lixiang New Town Project
  

The key project is the Shanghai Luodian Projects, which is part of Shanghai's 'One City Nine Towns' plan, which aims to have nine experimental new towns just outside China's biggest commercial city.

Business Model:

1. They are involved from the very beginning, from the site selection of raw land and master planning, up to the relocation and resettlement of residents and businesses.
2. They prepare the land for sale to developers, and the installation of infrastructure.
3. They acquire the land use rights to some parts of the new town to develop and operate commercial properties such as hotels and convention centres.
   

Key Competitive Strengths:

1. They are one of the first privately-owned companies to plan and develop new towns in PRC.
   
2. They have a good working relationship with the local governments.
   
3. They have diversified sources of revenue from the sale of land rights to the local governments and from the management and operation of commercial properties.

Key Risk Factors:

1. They have a very limited operating history, with only one new town project having been substantially completed thus far.
   
2. They will not generate positive cash flow during the construction of their projects, and will require further financing for future projects.
   

Financial figures

Intended IPO price: $0.83
No. of shares available for public offer: 12m
No. of shares available for placement offer: 388m
Total post invitation share capital: Approx. 1,401m

Note: Unaudited 2QFY2007 figures were available in the prospectus. However, its 2QFY07 results showed that it suffered losses, which suggests that its profits are only made in the 2nd half of the financial year. As such, I will only use FY06 results in my valuation.

FY2006
Revenue: $144.2m
Profit: $24m
NAV: 0.33
EPS: 0.0171
EPS % Incr: -22%
PE ratio: 48.5x
Price: 0.83

Dividend policy: No fixed policy.

Conclusion:

China New Town has stated that its intention is to become the largest new town developer in the PRC.

In fact, it operates differently in that it clears and prepares government-owned land for new town projects before it is sold to the usual third-party residential developers. Hence investors might find its business difficult to understand as there are no clear comparables.

It has also stated that it preferred a listing in Singapore instead of the more lucrative Shanghai and Hong Kong exchanges because it wants to distinguish itself from its Hong Kong-listed parent company.

And deeming from the performance of Chinese residential developer Yanlord, which also chose Singapore when it went public last year, being listed in outside of Hong Kong doesn’t appear to be on any disadvantage in terms of capturing the positive momentum towards the sector. Since its debut in June 2006, Yanlord has gained 240% from its IPO price.

Sources have also reported that its IPO attracted almost 200 institutional investors and ended up being more than 20 times covered, and investors include units of hedge fund Och-Ziff and Merrill Lynch.

Thus, it seems as if China New Town is one of those stocks that will do well because it has a good story to tell, whereas its business fundamentals are still too new to be solid.

And personally, I don't like investing on promises and not foundation, which is why I think I will give this a miss for now until its fundamentals become more stable.

But by doing soon, wouldn't I be missing out on the potential gains of being invested early if it turns out to be a winner?

The answer is yes, but my opinion is that an investor should not just consider the potential gains, but also should have the discipline to manage his risks well.


Probability of getting allotted for the IPO - FAIR


I have only included the key points of the prospectus. Certain information have been omitted in order to keep my write-up short, but you can find the entire prospectus here.