After a one-day delay to consider market conditions, China Everbright Bank has decided to go ahead with its plan for a Hong Kong listing and yesterday kicked off pre-marketing for what could become the largest share sale in Hong Kong so far this year.
The Beijing-based lender, which listed in Shanghai in August last year, has earlier said that it intends to sell up to 10.5 billion new H-shares in Hong Kong, with the potential to add another 1.5 billion shares through an overallotment option. Based on its current A-share price, this implies a base deal size of about $5.6 billion.
This is slightly less than the $7 billion talked about when China Everbright Bank first announced its Hong Kong listing plans in February. However, the sole reason for the smaller deal size is the drop in the A-share price since then, including an 8.9% drop in the past three weeks. The bank has made no change to the number of H-shares on sale and the Hong Kong offering will still account for 20.6% of the enlarged share capital.
And it is still significantly bigger than both Shanghai Pharmaceutical's $2 billion listing, which ranks as the largest Hong Kong share sale so far this year, and Prada's IPO of up to $2.6 billion, which is currently in the market.
The bank has obtained a waiver to offer only 5% of the deal to retail investors, although this could be increased to as much as 20% in case of strong demand.
The final mechanism for how to price the Hong Kong shares in relation to the A-shares hasn’t been decided yet, but sources say there is likely to be a floor based either on an average for the A-share price in a certain period leading up to the pricing, say 20 or 30 days, or the Shanghai IPO price, whichever is higher. The A-shares are currently trading about 12% above the IPO price. Given that most international investors have limited access to the A-share market, the Hong Kong offering won’t necessarily come at a discount to the existing A-shares, although other Chinese companies that have listed in Hong Kong after first obtaining an A-share listing have typically priced at a discount. The most recent example is Shanghai Pharmaceuticals, which priced its H-share IPO last month at a 2.4% discount to the A-share price at the time, and at the end of 2009 China Pacific Insurance (Group) Co and China Minsheng Bank both came at a slight discount.
In the current environment, which has seen a few IPOs being cancelled due to a lack of demand and many more trading poorly in the secondary market, investors are likely to want as cheap a deal as possible, but they are more likely to look at the absolute valuation of the bank in relation to its peers than the discount versus its own A-shares.
Analysts regard China Minsheng Bank, China Citic Bank and China Merchants Bank as the closest comparables since they are similar in terms of size and loan growth profile. Of the three, China Merchants Bank trades at a significant premium due to a perception of it being the best in class. Its H-shares are currently quoted at 2.1 times its 2011 book value, while its A-shares are quoted at 1.7 times. Minsheng and Citic Bank are trading at 2011 price-to-book multiples of 1.2 to 1.3 times both in Hong Kong and Shanghai.
Based on yesterday’s close of Rmb3.46, China Everbright Bank is trading at a 2011 P/B multiple of 1.5 times in the A-share market. And syndicate analysts supposedly agree that China Everbright deserves to trade at a premium to Minsheng and Citic Bank because of its faster growth across assets, loans and deposits.
The key challenge for China Everbright and its bookrunners, however, may be to convince investors why they should buy this stock when there are already nine other Chinese banks listed in Hong Kong.
China Everbright Bank is the 11th largest bank in China and the sixth largest among the national joint stock commercial banks. As of the end of March, it had total assets of Rmb1.69 trillion ($260 billion) and its net profit grew 67.4% in 2010 to Rmb12.8 billion.
According to an information document published on the Hong Kong stock exchange website it has a fast-growing and high-quality retail banking platform focusing on mid- to high-end customers, which includes a renminbi wealth management business and a corporate banking business that serves the majority of China’s state-owned enterprises under the administration of Sasac (the State-owned Assets Supervision and Administration Commission of the State Council) and a large number of the country’s top 500 enterprises. It also intends to develop its corporate banking business with small and medium-size enterprises with growth potential in economically developed areas like the Bohai Rim, the Yangtze River Delta and the Pearl River Delta, and in high growth areas like Central and Western China.
One source noted that while China’s biggest banks are all about investing in a proxy for the Chinese economy, the smaller banks are more about growth — and China Everbright is competitive on that front.
That said, aside from this being a challenging time for primary issuance, China Everbright Bank is also coming to market at a time when the market is concerned about a slowdown in China’s economic growth -- and even a hard landing. Yesterday, the Chinese central bank raised the reserve requirement ratio for banks by another 50 basis points to 21.5% for large banks and 19.5% for small and mid-sized banks, effective June 20. In a comment, Goldman Sachs said the move is “probably meant to be a signal to the market…that the central bank is not in a hurry to loosen policy amid elevated year-on-year CPI inflation (5.5%), despite the relatively low level of industrial activity growth.”
However, by starting investor education, the bookrunners have a chance to get proper feedback from investors, which will enable them to make more informed decisions of whether the deal can get done at this time — and at which price. And as shown by the fact that Samsonite raised $1.25 billion from its IPO last week, deals do still get done.
Under the current timetable, the institutional roadshow is expected to start in the week of June 27, with the pricing set for July 7. The Hong Kong trading debut is scheduled for July 15.
China International Capital Corp, Morgan Stanley, UBS and China Everbright’s own investment banking arm are joint global coordinators for the offering. They are also joint bookrunners together with a whole slew of other banks, namely BNP Paribas, BOC International, HSBC, J.P. Morgan and Shenyin Wanguo Securities.
China Everbright Bank raised Rmb21.7 billion ($3.2 billion) from its A-share IPO in August last year, by selling 7 billion shares (including an overallotment option of 900 million shares) at a price of Rmb3.10 apiece. That deal was arranged by CICC, China Jianyin Investment Securities and Shenyin & Wanguo Securities.
