China's Biggest Real Estate Developer Approved for IPO

China Construction Co. Limited, the country’s biggest real estate developer, was approved on Thursday by China’s securities regulator for the second initial public offering [IPO] this year.

The company will issue 12 billion A-shares and it’s expected to raise more than 40 billion yuan (5.71 billion U.S. dollar).

The first IPO approval was granted to China Railway Construction Corporation Limited [CRCC] on Jan. 23, one of the nation’s largest road project contractors, with an issuance of 2.8 billion shares.

According to China Construction Co. Limited pre-release prospectus, the raised capital will be used to fund big construction projects, infrastructure investment, commercial housing development and machinery equipment purchase.

As a heavyweight in construction and land development, the company made its name by building the National Aquatics Center, the Central China Television headquarter and the Shanghai Financial World Center, the highest skyscraper in China’s mainland.

Following an industry reshuffle, the company was reorganized at the end of last year by the parent company of China State Construction Engineering Corporation [CSCEC] which hold up to 94 percent of the shares. PetroChina, Baosteel and Sinochem Corporation accounted for 2 percent each.

Sales revenue of the group totaled 168.3 billion yuan last year, up 26.4 percent from a year ago. Net profit earned by the parent company reached 4.92 billion yuan in 2007, up 103.9 percent year on year.

China International Capital Corporation will lead the underwriting, according to the prospectus.

Comments

[J.D]

Wait until China's real estate glut works itself out before you buy. It's difficult to make money from an oversupply of empty shell buildings.

In any case, government should get out of the real estate business instead of asking minority investors to buy in and finance their whims and boondoggles.

[James V]

Actually the issue is not a over supply of empty shell buildings. Demand and supply are in equilibrium.

The demand however is concentrated heavily with speculators, therefore big price swings are the norm in China.

The very fact that the once hated real estate industry is now the darling of the government. The government has done nothing but try and reduce capital to the real estate industry. However because of the need to build so much new property due to the Sichaun diaster and the reality that the 'make-shift' infrastructure china has in place in inadequate (evidenced by the snow storms and earthquake), the government realises the need for further development.

I have said from the very start that a building boom will ensue after the earthquake as a 'cause and effect' consequence of lifting restrictions of capital invetsment in the sector. This is very symbolic of letting real estate companies raise money on the market.

There is a huge glut of money looking for a home, I believe the home will be real estate business. Lets not forget by international standards even taking rmb fx rate into consideration, China property is dirt cheap. Having researched property prices in every major city in the world, I am amazed at the very low price of property.

I expect a similar picture to what happend in the stockmarket to happen in property, on the way up and down.

Also it is the best domestic investment against inflation.
Which looks like its here to stay for a while.

[J.D]

There's a huge oversupply of empty shell buildings and new construction in China. R/e returns have been driven by capital gains not revenue streams and now-falling asset values aren't recognized on the books.

Some branches of government are trying to stop the investment in real estate to moderate the impact of a potentially imploding bubble. It even appears floorspace is being artificially held off the market to try and hide the problem.

Real estate developers, construction companies, and government in China are closely linked. The idea of an entrepreneurial class of developers is China is unrealistic. Corruption is a major part of the game. R/E is probably one of the worst investments in China at present.

Yes, real estate will help combat inflation as real prices will continue to fall. The huge glut of money in China has nowhere to go and is being devalued by an under-estimated monetary inflation problem.

[trumanburbank]

As with politics, all real estate is local. While there may be short-term bubbles in the hot Beijing and Shanghai mkts, China continues to urbanize at a rate and scale never experienced previously in history. Look to the second-tier cities, where property remains modestly priced and growth continues unabated. Xi'an, for example, just published its city development plan:

"Under Xi'an's new development plan, which was approved by the State Council of China on May 10, 2008 and covers the years 2008 through 2020, the population of the Main City Zone is expected to grow from 3.1 million people in 2007 to 4.5 million in 2010 and 5.28 million in 2020.

The new development plan also specifies that the average living area per person in the Main City Zone will increase from 161 square feet in 2007 to 237 square feet in 2010 and 355 square feet in 2020. To meet the new living area specifications, 567.4 million square feet of new housing will need to be built by 2010, and a total of 1.4 billion square feet of new housing will need to be added in the intervening 13 years from today to meet the new minimum specification by the end of 2020."

This is typical of growth projections for large cities in China. A recent McKinsey report estimated that China will soon have a billion urban residents, an increase from the present 650 million or so -- an increase roughly equivalent to the present population of the US.

Chinese real estate development has a considerable run ahead, with the occassional Beijing bubble along the way.

Disclosre: I own China Housing and Land Development (CHLN: NASDAQ)