Peter's Perspective
23rd December 2014 by Peter Churchouse

China Property Mints Another Billionaire

This morning I did a slot on BBC TV where we talked about the latest China IPO to hit the market.

It is an extraordinary story.

The company, Dalian Wanda Commercial Properties, is now a US$28 billion market capitalisation company. It is the world’s largest ever real estate IPO.

In terms of size, it immediately ranks in the world’s top five real estate companies by market capitalisation.

And it has made its founder Wang Jianlin a multi-billionaire worth around US$14 billion. Not bad for a former army officer!

Dalian Wanda is huge and unique. Most listed Chinese property companies are property developers with a “build and sell” business model. They tend to hold very little of their properties for long term rental purposes. Dalian Wanda is the exception. Its investment property portfolio is vast, and getting bigger.

As of June this year its completed investment properties, made up mainly of retail malls, offices, and hotels, amounted to a massive 181 million square feet of floor space (that’s the equivalent of 50 times the new One World Trade Center in New York).

On top of that it has a staggering 825 million square feet of space either completed for sale, under construction or waiting to commence building works.

The portfolio at June included 159 commercial centres and more than 100 hotels in 110 cities in China.

It is also building the tallest residential building in Europe on the banks of the River Thames in central London.

By being hugely focused on developing and owning investment properties the company is likely to enjoy a reasonably stable and fairly predictable income stream, something that few other China property companies can boast. It comes to market at a reasonable valuation of about 8.5 times forward earnings, and in line with other larger Chinese property companies.

But investment property companies with a large stable earnings base normally trade at a valuation premium to their “build and sell” developer cousins.

This company is on our radar screens. We like its recurrent income business model. But we do have some reservations about its debt levels.

Its debt to equity ratio of 88% as at June puts it amongst the most highly geared of the China property companies listed in Hong Kong. Moody’s gives the company a Baa2 rating with positive outlook resulting from the company’s IPO. That should give investors some comfort on the debt front.

Cornerstone investors include New York hedge fund Och-Ziff Capital Management, the Kuwait Investment Authority, Dutch pension fund APG as well China Life Insurance and Ping An Insurance.

The company’s roots are in Dalian, and industrial city in north eastern China. It was certainly not in evidence when I first visited the city back in 1983. In fact the parent company was not incorporated until almost ten years later in 1992, and Dalian Commercial Properties was only established in 2002.

Not bad to go from a standing start to a portfolio of 180 million square feet in such a short space of time.

Impressive though the real estate portfolio might be, it is not the only business that the wily Mr. Wang controls. Not only does he control the largest cinema company in China, but also the second largest movie company in the US, AMC.

He is also reported to be in discussions about taking a stake in the studio Lions Gate.

And more recently he made a big splash with his acquisition of UK based leisure boat maker, Sunseeker. (This is exactly the kind of activity we talked about in our November edition of The Churchouse Letter).

We’ll be keeping an eye on Dalian Wanda and Mr. Wang. Meanwhile, our two Chinese property developer recommendations are up 15 percent and 32 percent respectively.

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