Realtor IPO overcharges for Chinese housing

Founded in 2001, Beijing-based KE claims a 19% share of China’s gravity-defying, over-brokered home sales and rentals market

  
A general view of the financial Central district in Hong Kong, China July 25, 2019. Image used for illustrative purpose.

A general view of the financial Central district in Hong Kong, China July 25, 2019. Image used for illustrative purpose.

REUTERS/Tyrone Siu

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

HONG KONG  - The New York stock exchange has a new Chinese tenant. KE, which operates home broker Lianjia and sales-and-services platform Beike, plans to price shares in its initial public offering above the top end of a marketed range, raising $2.1 bln. Home sales in China are recovering from a pandemic-induced slump, and KE is growing fast. But the price could cause buyers’ remorse.

Founded in 2001, Beijing-based KE claims a 19% share of China’s gravity-defying, over-brokered home sales and rentals market. Its Beike platform is the country’s biggest home transactions and services outfit, it says, offering sales, rentals, renovations and loans. Roughly half a million agents use the platform, which facilitated over 1.4 million housing transactions in the first half of 2020. Backers include SoftBank and Tencent, and the latter funnels customers to KE through its WeChat app, which has 1.2 billion monthly active users.

China’s real estate market has regained its mojo in recent months, supported by credit stimulus and the lifting of pandemic-related curbs on travel. Investment rose 8.5% year-on-year in June compared with 8.1% growth in May, according to official data, and new home prices in 70 big cities rose at their fastest clip since last summer. Measures to boost credit and cut interest rates fuelled a rebound in mortgages, spurring sales at KE. Revenue dipped 13% year-on-year in the first three months, but almost doubled in the last quarter to $2.9 billion.

Still, at $20 a share, KE is worth $23 billion, bigger than Chinese property developer Sunac. Assuming it generates as much in sales in the next two quarters as it did in the second, and applying a 10% EBITDA margin, KE would be valued at 21 times 2020 EBITDA. While global peers such as REA and Rightmove are pricier, local ones such as Fangdd and E-House trade between 7 and 11 times.

It’s a tricky time for a Chinese company to seek a second home in lower Manhattan. The U.S. Senate recently passed a bill that could force Chinese firms that don’t comply with American accounting oversight to delist. That’s a real risk, and KE’s dual-class stock and quirky partnership structure are troublesome too. NYSE tenants hoping for a quiet neighbour are likely to be disappointed.

CONTEXT NEWS

- Online real estate services company KE Holdings plans to raise $2.1 billion from its initial public offering in New York, marking the biggest U.S. IPO of a Chinese company in two years.

- KE plans to sell 106 million American depositary shares at $20 each, above the top end of a marketed range of $17 to $19 a share, Refinitiv publication IFR reported on Aug. 12, citing people close to the deal.

- KE owns and operates Lianjia, a real estate brokerage, and Beike, an online and offline platform for housing transactions and services.

- KE’s IPO will be the biggest U.S. listing of a Chinese company since iQiyi raised $2.3 billion in 2018.

- Goldman Sachs, Morgan Stanley, China Renaissance, JPMorgan and CICC worked as underwriters on the offering.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Pete Sweeney and Jamie Lo) ((alec.macfarlane@thomsonreuters.com; Reuters Messaging: alec.macfarlane.thomsonreuters.com@reuters.net))

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