China Everbright Bank (CEB) has raised HK$23.25 billion ($3.0 billion) ahead of its Hong Kong listing after exercising the 15% upsize option in full and fixing the price below the mid-point of the range.
That makes it the largest new listing both in Hong Kong and in Asia ex-Japan so far this year, ahead of China Cinda Asset Management’s $2.45 billion deal.
New listings include both initial public offerings and companies that are already listed but are raising new capital from a share sale and listing in a second market. CEB has been listed in Shanghai since August 2010 and this is its third attempt to go public in Hong Kong.
The size of the deal is impressive, especially in light of the fact that the Hong Kong H-shares were offered at a premium to the Shanghai-listed A-shares. However, the $2.5 billion base deal was fully covered by cornerstones and anchor investors at the bottom of the range at launch, and according to sources that demand came almost entirely from Chinese entities, especially companies and high-net-worth individuals – the kind of money that is commonly referred to as “friends and family”.
And the incremental demand that came in during the four-day bookbuilding and allowed the upsize option to be exercised was really not much different, the sources said. International investors were for the most part staying well clear of the deal, with the exception of some accounts that have access to qualified foreign institutional investor (QFII) quotas. As that quota gives them the right to buy and sell A-shares they have the ability to arbitrage the difference between CEB’s A- and H-share price, making the share sale interesting from a technical point of view.
However, most of the international investors that did come into the deal did so at the bottom of the range. And since the price was fixed above that, many of them failed to get allocated.
According to the prospectus, CEB signed up 20 cornerstones that agreed to buy a combined $1.744 billion worth of shares. Of those, 18 are Chinese or China-linked investors based either in the mainland or in Hong Kong, including an investment arm of the state-owned China Shipping (Group) that took up $800 million worth of shares.
The two exceptions are The Prudential Insurance Company of America and Sun Life Assurance Company of Canada, which each bought $50 million worth of shares.
The two life insurers are said to have been looking at an investment in CEB since it first tried to list in Hong Kong and are believed to have strategic reasons, such as a potential cooperation around banc assurance, that outweigh the premium pricing. A $50 million investment is pretty minor, though, both in relation to the total deal size and compared to the size of Prudential Insurance and Sun Life.
Hong Kong-based Sun Hung Kai Strategic Capital, which bought $10 million worth of shares, has already entered into a long-term strategic cooperation agreement with CEB with regard to cross-border financial services.
To underline the somewhat artificial line-up of Chinese buyers for this deal, the prospectus noted that five of the cornerstones may obtain a loan to cover the investment that may require them to pledge some or all of their CEB shares as security. Together these five are took up $277 million worth of shares.
In addition to the cornerstone tranche, the deal included an anchor tranche of the same size that, according to sources, had largely the same look and feel as the cornerstone tranche. The key differences between these two “tranches” were the fact that the anchors weren’t disclosed in the prospectus and didn’t have to commit to a six-month long-up.
CEB offered 5.08 billion new shares as part of the base deal, which accounted for 11.2% of the enlarged share capital. On top of that there was an upsize option of 762 million shares, which, as mentioned, was exercised in full, bringing the H-share free-float to 12.6%.
CEB is only the second Hong Kong listing candidate to make use of an upsize option after AIG Group in 2010. By breaking out the upsize option from the base deal, the issuer is not tied down to a larger deal in case the demand is not strong enough but has the flexibility to increase the size if it is.
In addition to the upsize option, CEB also has a normal 15% greenshoe that may be exercised depending on how the stock trades in the first 30 days. If the shoe is exercised as well, the bank can raise as much as $3.39 billion.
The shares were offered at a price between HK$3.83 and HK$4.27. Adjusted for the exchange rate, the bottom of the range is equal to CEB’s net asset value of Rmb3.03 at the end of the first quarter. As this is the bank’s latest audited NAV, or book value, it also serves as the floor price for the H-share offering. (China doesn’t allow state-owned banks to sell new shares at a price below their lasted audited book value).
On a forward basis, which is how the lead banks preferred to market the stock, the price range translates into 0.89 to 0.99 times the projected 2013 book value.
The final price was fixed at HK$3.98, which equals a 2013 price-to-book multiple of about 0.93. The two latest Chinese banks that listed in Hong Kong in November, Huishang Bank and Bank of Chongqing, are currently trading at 2013 P/B multiples of 0.96 and 0.92 respectively. China Merchants Bank, which is one of the leading regional commercial banks in China, is quoted at about 1.17 times, while the big-four state-owned banks are trading at between 0.8 and 1.1 times.
The retail portion of the deal was fully subscribed, the sources said, although not to the extent that it would trigger a clawback. That means the initial 95-5 split of the base deal between institutional and retail investors will remain unchanged. However, since the upsize option is going only to institutional investors, retail investors will hold 4.3% of the H-shares at the time of listing.
The deal also included a public offering without listing (Powl) to retail investors in Japan, which was expected to account for about $250 million.
CEB will start trading in Hong Kong on December 20.
CICC, Morgan Stanley and UBS were joint global coordinators and bookrunners for the IPO, while ABC International, BNP Paribas, BOC International, China Everbright Securities, Essence Securities and Haitong International were also joint bookrunners.
