Shui On Prepares Ground for China Unit IPO 瑞安准备分拆新天地上市

By newsdoug on May 30, 2012

Shui On prepares IPO for Shanghai Xintiandi unit Investors rapidly losing interest in the tired old group of Chinese real estate developers, many of them fading rapidly as China tries to cool the overheated property market, might want to take a look at an interesting news bit coming from Hong Kong, where local developer Shui On (HKEx: 272) is preparing what could be a new trend-setting IPO for one of its China units. The deal would see Shui On spin off its Xintiandi unit, operator of the hugely successful Shanghai complex of restaurants and shops by the same name, into a separate company for a listing in Hong Kong. (English article) In my view this offering looks extremely attractive and interesting for a number of reasons, both from the individual company and broader industry perspective. From the company perspective, Xintiandi offers an attractive play into the China real estate space with a highly unusual product, namely commercial-use properties created by the rehabilitation of older buildings into modern recreational complexes of shops and restaurants. As a resident of Shanghai, I can personally attest to the huge popularity of Xintiandi’s original project here in the city, though I should also note that the complex counts foreign expats and tourists as some of its biggest patrons — a feat that could be difficult to replicate in other cities without such big foreign populations. Despite that potential drawback, Xintiandi presents an interesting growth story for investors, with the unit planning to try to replicate its Shanghai success in other major Chinese cities including Chongqing and Wuhan. I like this concept, as it will be hard for other companies to replicate such developments and clearly there are plenty of Chinese cities with older buildings that could be similarly rehabilitated, probably with strong local government support. This kind of company is also attractive because of its commercial real estate focus, which means it will be much more resistant to downturns in the highly cyclical real estate market that tend to see residential developers suffer the most. From the broader perspective, this kind of deal could perhaps signal the beginning of a movement by Hong Kong and other Asian real estate firms that have invested heavily in China to spin off their Chinese assets into separate publicly listed companies to give investors an alternative to tired old choices like Vanke (Shenzhen: 000002) and Soho China (HKEx: 410), which are good at building big numbers of new homes but tend to lack excitement. Right now many Hong Kong companies have heavy investments in China, but they have even bigger investments in their home markets, making their stocks an odd hybrid with heavy exposure to both places. Moves like this one with Shui On and Xintiandi will provide a nice new investment option for people looking for exposure to commercial real estate in China, and we might expect to see 1 or 2 similar moves by other Asian developers in the next year or 2.

Bottom line: Shui On’s plan to spin off its Xintiandi China unit into a separately listed company could mark the start of an interesting new option for China real estate investors.

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