Shanghai-Based Developer Zhongliang Holdings Files for HK$3.5B IPO

China’s only 100-billion-yuan privately held developer, Zhongliang Holdings Group, plans to raise up to HK$3.54 billion ($453 million) in an initial public offering on the Hong Kong Stock Exchange, according to official filings by the company.

The Zhejiang-based home builder is preparing to sell 530 million shares, or 15.01 percent of its enlarged issued share capital, at HK$5.20 to HK$6.68 per share at its IPO, which is scheduled for July 16, according to the latest copy of its prospectus.

The 25-year-old company, which in the first five months of this year ranked among China’s top 20 developers by contracted sales, had previously filed for an IPO last November, with the filing for that listing having expired in May. In this latest prospectus, the company did not address its previous IPO filing.

CCB and Guotai Coordinating IPO

In its prospectus, Zhongliang said that it will use 60 percent of the listing proceeds, equivalent to HK$1.75 billion, to build residential properties and 30 percent, or HK$875.5 million, to repay debts. The remaining 10 percent, or HK$291.8 million, would be used for general working capital.

The public offering commenced on 27 June with potential participants having until 8 July to file their subscriptions. Pricing and share allotments are scheduled to be announced on 15 July.

Investment banks CCB International Capital and Guotai Junan Securities are serving as joint global coordinators for the public offering with the pair of mainland financial players being joined as joint bookrunners by compatriots Huatai Financial Holdings, and ABCI Capital, as well as Japan’s Nomura International.

Country Garden Junior Grows Up

As the company prepares for the IPO, Yang and his wife, Xu Liangqiong control more than 99 percent of Zhongliang’s shares.

Founded in 1994 by Wenzhou businessman Yang Jian, Zhongliang has taken Country Garden, the country’s third largest developer by sales and a specialist in developing projects in China’s lesser urban hubs, as its role model and focused on projects in third and fourth tier cities.

Over the last three years, Zhongliang has been rapidly expanding the amount of land it has been buying in smaller cities. The company acquired 168 parcels in third- and fourth-tier cities in 2018, up from 88 in the previous year and 34 in 2016.

Zhongliang has a portfolio of 353 projects across 124 cities in China, with a land bank amounting to 38.9 million square meters (418 million square feet) as of the end of March, according to its prospectus.

The company moved its headquarters from Wenzhou to Shanghai in 2016, and between 2016 and 2018 its sales grew from RMB 19 billion to RMB 101.5 billion to become one of China’s fastest growing property developers.

Finance Company Keeps Debt Off Developer’s Books

Despite Zhongliang’s rapid expansion, the developer has been able to reduce its debt-to-equity ratio seemingly in reverse proportion the growth of its land bank. The company’s debt to equity figure was at 58.1 percent at the end of 2018, down from 339.5 percent the year before and 1,790.2 percent at the end of 2016.

One key to the company’s financial magic may be the 2015 establishment of Shanghai Zhongxin Xu Enterprise Management Company, also known as Zhongxin Capital an asset management firm helmed by Yang Jian’s wife and Zhongliang executive director Xu Liangqiong.

Headquartered in Shanghai, Zhongxin Capital has established nine asset management subsidiaries which manage  over over RMB 30 billion in capital across 34 funds and 137 investment projects.

Shantytown Specialist

Zhongliang has also proved expert at surfing an investment wave driven by China’s shantytown redevelopment program,  and initiative launched in 2005 to replace aging housing and slums in urban areas with modern homes through projects run by local governments.

In its prospectus, Zhongliang noted that since 2015 it had moved to capture market opportunities brought by the government’s shantytown redevelopment policies, which were expanded in 2013. The developer pointed to its ability to apply standardised processes to these redevelopment projects as helping fuel its growth from 2016 through 2018.

The shantytown redevelopment program has, however, been scaled back this year after the government initiative was criticized for driving up home prices in third- and fourth-tier cities. With cash reimbursements offered by local authorities to homeowners displaced under the program having become a tool for locals to speculate on the  housing market via down-payments on multiple new homes, the government is now restructuring the redevelopment effort.

In the prospectus, the company’s CEO, Huang Chunlei, said Zhongliang hopes to continue its rapid growth through focusing on projects in western and central China where land can be acquired at lower cost.

Fast and Risky in the Smaller Cities

Zhongliang has been known for adopting a rapid-asset-turnover development model, in which it focuses on rapid completion of small to medium sized developments, taking an average of only seven months from land acquisition to commencement of project sales.

The company has also specialised in smaller ticket projects, with more than 76 percent of the land parcels it purchased in 2018 having been acquired for less than RMB 500 million and more than 60 percent of the projects having gross floor areas of less than 120,000 square metres during the same period.

The company’s fast turnover model has also been tied to a number of safety accidents. In its prospectus, Zhongliang disclosed as a risk factor that on August 1, 2017, there was a work safety accident in a construction site in Xuzhou of the Jiangsu province, which caused the death of five construction workers and injured another team member.

In November last year, Zhongliang filed for IPO in Hong Kong, but the application lapsed in May, six months after the filing. The company then updated its prospectus and handed in a new version on May 17.