A major developer of, and financial investor in, Asia Pacific logistics parks has launched a potential US$1.24 billion initial public offer on the Hong Kong stock exchange.
Hong Kong headquartered ESR expects dealings on the Hong Kong Exchange to being on Thursday, June 20, under the stock code 1821.
The company is offering 560,700,000 shares (31.4 million, or 5.6 percent of the offer, via the Hong Kong Exchange and the vast bulk of 529.3 million, or 94.4 percent of the offer, via an international placement).
Analyst reaction has been mixed. Sumeet Singh head of research at Aequitas Research described the company on the Smartkarma platform as a “giant in the making”. But Singh noted that the shares are being offered at 25 to 27 times 2019 financial year enterprise value / earnings before interest, taxation and depreciation. And that multiple falls to 22 to 23 times on a 2020 financial year EV/EBITDA basis. Peers are trading at 27 times for the 2019 financial year and 25 times for the 2020 financial year.
“Given the rich valuation… and comparison to listed peers, the upside from current valuations remains unclear. In addition, despite being a large deal, having reputed partners in its funds and being in an attractive sector, the deal hasn’t garnered any cornerstone investors at all, which to me isn’t a great sign,” Singh said in a research note. He notes that the company has been aggressive in acquiring assets around the Asia-Pacific area. “This makes one feel that operation were being ramped up into the IPO, which is not bad, but how aggressive the growth will be post listing remains to be seen,” he added.
Analyst Arun George of Global Equity Research Ltd, who also publishes research on Smartkarma, suggested that ESR should “trade at least in line with its peer group due to its robust fundamentals and growth prospects”. He added that if the group does in fact trade on a price to book value and a price to net tangible asset basis, then the implied pre-money valuation range is about US$4.6 billion to US$5.2 billion.
Share pricing and fund-raising
Shares will be priced in the range of HK$14.58 to HK$17.40 (US$1.86 to US$2.20).
If the IPO is successful at the upper end of the range it would generate HK$9.76 billion (US$1.24 billion). At the lower end, it would generate just over HK$8.18 billion (US$1.04 billion). However, the company estimates it will raise net proceeds (after fees, commissions and other expenses) of about HK$5,273.5 million (U.S.$671.8 million), assuming an offer price of HK$16.80 per share, which is at the mid-range of the offer.
The vast majority of that cash will be used to retire debt and unconverted preference shares. About HK$4,732.5 million (approximately US$602.9 million) , which is 89.7 percent of the offer, will be used for this purpose. The remaining 10.3 percent, about HK$541.0 million (US$68.9 million) will be invested in logistics properties, either off its own balance sheet or as co-investments alongside the funds it manages. The company plans to continue with a find-and-develop strategy; hopes to enter new markets in Asia and also attract more capital into its investment funds.
Logistics-related real estate
ESR is an Asia-Pacific focused provider of logistics related real estate. It currently operates locations near logistics hubs, seaports and airports in China, Japan, South Korea, Singapore and India. ESR is also a fund manager of third-party funded property funds. The company aims to create facilities that serve retailers (e-commerce and physical), manufacturers, third-party logisticians, cold-chain logistics providers and others.
As at December 31, 2018, ESR boasted of 33 directly owned properties with a gross floor area of 2.9 million square meters (U.S. 31.2 million square feet), of which 1.33 million square meters (U.S. 14.3 million square feet) are completed; 1.26 million are under construction and 0.3 million is land held for future development.
A considerably larger amount of property is held by the funds and investment vehicles ESR manages. As at the end of 2018, third party-owned properties under its management stood at 9.15 million square meters. About 5.2 million square meters were in completed properties; 2.45 million were in properties under construction and 1.46 million was land held for future development. It manages 19 funds and investment vehicles.
Revenues, profits, net assets
ESR generated US$254.1 million of revenues in 2018, which represents a 65.8 percent rise from the year before. The company generates a large amount of its revenues from management fee income: US$135.6 million last year, which is 53.4 percent of total revenues. In its prospectus, ESR said that the net profit in 2018 stood at US$213.1 million. “The majority of our profit was derived from fair value gains on investment properties and share of profit and losses of joint ventures and associates,” the prospectus said. The company also generates rental income from the properties it develops and capital gains from selling developments.
The company’s unaudited pro-forma balance sheet shows net assets of US$2.3 billion. It has non-current assets of US$4.3 billion, current assets of $637.4 million, non-current liabilities of US$1.7billion and current liabilities of US$4.02 billion.
History of ESR
ESR began life as two separate companies. Firstly, the Redwood Group was set up in 2006 by Stuart Gibson and Charles Portes to focus on logistics development in Japan. Secondly, a company called E-Shang was set up by WP OCIM and Jinchu Shen to focus on growth in China. The two merged in 2016 and expanded in 2017 in Singapore and India. In 2017 it entered Australia through acquiring equity stakes in Australia Stock Exchange listed companies. In August 2018, it bought the whole equity of a developer of commercial and industrial real estate projects.
Financial, legal, property valuation, and other advisors
Joint financial sponsors to the IPO were Deutsche Securities Asia and CLSA Capital Markets.
Financial institutions providing coordination, book-running and lead management services are Deutsche Bank; CLSA; Citigroup (various divisions); Credit Suisse (Hong Kong); DBS Asia Capital; Goldman Sachs (Asia); BNP Paribas Securities (Asia); China International Capital Corporation Hong Kong Securities; Credit Agricole; Mirae Asset Securities and UOB Kay Hian Hong Kong.
Legal advice was provided by Latham & Watkins (HK and U.S. law); Global Law Office (China); Nagashima Ohno & Tsunematsu (Japan); Shin & Kim (South Korea); White & Case (Singapore); Corrs Chambers Westgarth (Australia); Kanga & Co (India); Walkers Hong Kong (Cayman Island and BVI); Freshfields Bruckhaus Deringer (HK and U.S.); Commerce & Finance Law Office (China).
Property valuers were Beijing Colliers; Cushman & Wakefield; and CBRE.
Other advisors include Ernst & Young (accounting and auditing); Jones Lang LaSalle (industrial); Standard Chartered Bank (receiving bank); Octal Capital (compliance advice).