Wednesday, October 31, 2007
SOHO China (410): Where's my money?
SOHO China has made itself a celebrity among Chinese developers. Pan and Zhang are legends in the eyes of many Chinese, for they invented a whole new category of housing in Beijing - SOHO living. One can't but admire the beauty of the architecture and planning of their projects which, I think, put nearly all HK developers in shame by comparison. The reward is celebrity valuation. Pan wants to achieve what Steve Jobs has done for the IT business - to continuously innovate and bring 'coolest' surprises to the market, but in hard property assets (and of course earn a lot of money as well). In other words, to 'intangiblize' the company and rid itself of the burden of having to carrying assets, land in this case.
Many already know and have talked about SOHO's lack of land. But how severe? I've extracted some figures from the prospectus, but after making some adjustments because in there you will find even a project completed in 2001 (!) included in the landbank calculation (although it won't affect the net result, it's misleading nonetheless).
Total Saleable GFA*: 0.9 million sqm
Less GFA presold: 0.23 million sqm
Useable landbank: 0.69 million sqm
*this already includes Tiananmen South project which SOHO said it would acquire (but not yet) from Pan, and two hotels.
I'm not sure if it can be called a bank when land is this little. There are actually only two projects on hand to be developed, i.e. Sanlitun SOHO and Tiananmen South, with the rest pretty much sold out already. Note there's nothing left from those finished projects so don't expect there'll be income stream from rental. But oddly enough, I've read from more than one places quoting Pan saying 'SOHO has enough land for development for the next 5 years'. Well, these two sites better be worth a lot more at time of sale, because the latest market value of SOHO has risen to $52 billion.
Next I'll try break down the valuation into pieces to get a better perspective.
NAV of SOHO: $1,368 million
Add 2007 profit: $1,624 million
Add IPO proceeds: $11,426 million
Total: 14,418 million or $14.4 billion
Mkt value: $52 billion
From 1st look, it appears SOHO has indeed invented a new way of valuing property companies. Market value is 3.6 times NAV post listing, yet 80% of the NAV is cash! Essentially people are willing to pay premium for cash held in Pan's hands, believing he can both find land and deliver exceptional return at the same time!
But wait! There's should be more profit beyond 2007 right? And projects on hand should be worth a lot more than NAV on books. So in all fairness I've tried this approach.
Valuation of SOHO's interest in all properties: $17.5 billion
Less all liabilities net of cash and minority interest: aprox. ($6.5 billion)
Add IPO proceeds: $11.4 billion
Total: $22.4 billion
Mkt value: $52 billion
I usually don't take property valuation in a selling document at face value, but it sure has a comforting effect when premium over adjusted NAV has come down from 260% to 132%. But now we've marked up the properties to market value, where does that remaining premium (i.e. $29.6 billion or 57% of market value) come from?
Well for one, the Sanlitun SOHO project is a vacant land now and hence its valuation ($7.6 billion) only reflects land appreciation, but not future development profit (on construction and finance cost and etc) and the SOHO premium, if there is one. Development cost is estimated to be about $2.1 billion. Say SOHO can make 100% profit out of this, which is possible since past gross profit was as high as 57% in 2006, and so the further adjusted NAV becomes $22.4 billion + $2.1 billion = $24.5 billion.
More than half of the market value is still missing? I suspect it's a product of Pan's charisma, the 'tycoon' effect, the nice PR work of the sponsors, and last but not least, the yet-to-be-acquired Tiananmen South project.
(to be continued)
Many already know and have talked about SOHO's lack of land. But how severe? I've extracted some figures from the prospectus, but after making some adjustments because in there you will find even a project completed in 2001 (!) included in the landbank calculation (although it won't affect the net result, it's misleading nonetheless).
Total Saleable GFA*: 0.9 million sqm
Less GFA presold: 0.23 million sqm
Useable landbank: 0.69 million sqm
*this already includes Tiananmen South project which SOHO said it would acquire (but not yet) from Pan, and two hotels.
I'm not sure if it can be called a bank when land is this little. There are actually only two projects on hand to be developed, i.e. Sanlitun SOHO and Tiananmen South, with the rest pretty much sold out already. Note there's nothing left from those finished projects so don't expect there'll be income stream from rental. But oddly enough, I've read from more than one places quoting Pan saying 'SOHO has enough land for development for the next 5 years'. Well, these two sites better be worth a lot more at time of sale, because the latest market value of SOHO has risen to $52 billion.
Next I'll try break down the valuation into pieces to get a better perspective.
NAV of SOHO: $1,368 million
Add 2007 profit: $1,624 million
Add IPO proceeds: $11,426 million
Total: 14,418 million or $14.4 billion
Mkt value: $52 billion
From 1st look, it appears SOHO has indeed invented a new way of valuing property companies. Market value is 3.6 times NAV post listing, yet 80% of the NAV is cash! Essentially people are willing to pay premium for cash held in Pan's hands, believing he can both find land and deliver exceptional return at the same time!
But wait! There's should be more profit beyond 2007 right? And projects on hand should be worth a lot more than NAV on books. So in all fairness I've tried this approach.
Valuation of SOHO's interest in all properties: $17.5 billion
Less all liabilities net of cash and minority interest: aprox. ($6.5 billion)
Add IPO proceeds: $11.4 billion
Total: $22.4 billion
Mkt value: $52 billion
I usually don't take property valuation in a selling document at face value, but it sure has a comforting effect when premium over adjusted NAV has come down from 260% to 132%. But now we've marked up the properties to market value, where does that remaining premium (i.e. $29.6 billion or 57% of market value) come from?
Well for one, the Sanlitun SOHO project is a vacant land now and hence its valuation ($7.6 billion) only reflects land appreciation, but not future development profit (on construction and finance cost and etc) and the SOHO premium, if there is one. Development cost is estimated to be about $2.1 billion. Say SOHO can make 100% profit out of this, which is possible since past gross profit was as high as 57% in 2006, and so the further adjusted NAV becomes $22.4 billion + $2.1 billion = $24.5 billion.
More than half of the market value is still missing? I suspect it's a product of Pan's charisma, the 'tycoon' effect, the nice PR work of the sponsors, and last but not least, the yet-to-be-acquired Tiananmen South project.
(to be continued)
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