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Funds News

IPO VIEW-Chinese real estate IPO should price high

NEW YORK, Aug 3 (Reuters) - A Chinese real estate services company may beat its own hopes of raising $226.8 million in its initial public offering in the United States next week on the strength of soaring Chinese property prices and despite recent stock market volatility there, analysts said.

Shanghai-based E-House (China) Holdings Ltd, the thirteenth Chinese company to launch an IPO this year on either the New York Stock Exchange or the Nasdaq, has filed to sell 16.8 million American Depositary Shares under the symbol "EJ" EJ.N on the New York Stock Exchange.

The anticipated price range is $11.50 to $13.50 per ADS, with each representing one common share.

The company is a primarily a residential real estate brokerage with 1,800 employees in 20 cities that also provides consulting and information services.

E-House is the market leader and the first Chinese real estate services company to make its debut on U.S. exchanges, analysts said.

That makes it a natural choice for investors interested in profiting from the breakneck pace of economic growth in China, whose housing market is the polar opposite of the the slumping one in the United States.

Chinese real estate prices nationwide have risen 26 percent this year on average and over 30 percent in major cities, said Benjamin Wey, president of investment bank and consulting firm New York Global Group, which specializes in China-related advising.

“(E-House) produces good income statements,” said Francis Gaskins, president of independent research firm IPOdesktop.com. “It’s an easy, visible way to play growth in China in an easily understandable market.”

Given the appeal of Chinese real estate, E-House should price at the top of its range and could easily trade at a premium on its scheduled IPO date of Aug. 7, said Gaskins and William Wilson, an analyst at Boulder, Colorado-based Morningnotes.com.

The stock will trade over $15 on its first day and could reach $25, Wey said.

Offerings from China were especially hot in the final months of 2006 due to the country’s prospects for continued rapid development fueled by its massive population.

Then a 9 percent, one-day drop in February on China's main Shanghai Composite .SSEC index scared some away from Chinese offerings on the United States exchanges, Wilson said.

But the specter of Chinese market volatility probably will not darken E-House’s debut because Chinese stock market uncertainty simply drives more people into real estate, viewed by the Chinese as relatively safe and stable, Wilson said.

IRRATIONAL EXUBERANCE?

Not every recent Chinese IPO has fared as well as analysts think E-House will, however.

Excessively high initial valuations have doomed some offerings to lackluster performance later, Wey said.

Xinhua Finance Media Ltd XFML.O is a prime example of this phenomenon, Wey said.

The media and advertising company offered shares at $13 in March, but has tumbled 45 percent since then.

Of the seven companies that staged offerings in May, June and July on the New York Stock Exchange and Nasdaq, the shares of four are down.

With a likely initial market capitalization of about $932.6 million, E-House falls in the middle of recent Chinese IPO's size range. LDK Solar Co Ltd LDK.N made its debut with a projected market capitalization of about $2.72 billion, while China Sunergy Co Ltd's CSUN.O initial market capitalization was about $435.1 million.

But analysts said they are not worried that E-House is overvalued.

E-House’s strong financials indicate skilled management, Gaskins said.

The company’s revenue rose 79 percent to $56 million between 2004 and 2006 and its net income was $18.1 million in 2006 compared with $5.6 million in 2004.

Even E-House, however, is not without risk, Wey said.

One of the company’s foremost advantages is its special relationships with local developers under which it not only receives the exclusive right to represent properties, but also buys as much as 20 percent of them in a risky strategy that has proven exceptionally rewarding, Wey said.

But more sophisticated multinational companies such as Jones Lang LaSalle Inc JLL.N and Century21 are already becoming formidable competition to E-House, Wey said.

Also, real estate in China cannot continue to grow at its current pace forever, he said. The government already has policies in place to restrict prices and could tax real estate brokers and agencies.

“This industry can get chilled very quickly,” Wey said.

See www.reutersrealestate.com for the new global service for real estate professionals from Reuters.

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