China Huarong Asset Management has kicked off a Hong Kong initial public offering that could raise $2.5 billion to $3 billion, according to two sources familiar with the situation.
The move by the country’s largest bad-debt manager comes after it sold a 21% stake to eight strategic investors in August for $2.4 billion and is part of China's efforts to attract more private capital to its state-owned enterprises.
China Huarong, headed by chairman Lai Xiaomin, has appointed Citi, Goldman Sachs, HSBC and ICBC International as co-sponsors to arrange the transaction.
The company, which held a kick-off meeting in Beijing in late December, is planning to file a listing application to the Hong Kong Stock Exchange by June and launch the deal as soon as in the third quarter, said one source.
However, the deal’s size and timetable are tentative as it’s still at a preliminary stage, said the sources.
China Huarong sold Rmb14.5 billion ($2.4 billion) worth of shares in August to Goldman Sachs, Malaysian sovereign fund Khazanah, Warburg Pincus, China Life Insurance, Fosun International, CICC, Citic Securities International and Cofco.
The company will be the second asset management company from mainland China to seek a public listing, following China Cinda Asset Management, which raised $2.8 billion in December, 2013.
Cinda set a valuation benchmark when it priced its IPO shares at 1.3 times book value for 2013 and 1.15 times its 2014 book value, based on the joint bookrunner consensus. Its shares were trading at 1.43 times its book value on Wednesday, according to Bloomberg data.
Bad loans rising
China Huarong will go public at a time when bad loans in China have picked up amid an economic slowdown.
The country’s GDP growth rate is at a 6-year low of 7.4% to 7.5%, compared to the double-digit rate during the past 30 years. Only 78% of manufacturing capacity was utilised last year, the lowest percentage since 2009.
Chinese commercial banks’ non-performing bank loans ratio increased to 1.16% from 1.07% in the third quarter, the first time the ratio and the amount of outstanding non-performing loans both rose in the year, said China Banking Regulatory Commission.
An economic slowdown would in fact have a negative impact on the value of all the assets in such asset management companies’ existing portfolio.
But there is also a theory that the distressed asset managers are a counter-cyclical play that will benefit from an expected increase in non-performing loans over the next few years.
This of course is reliant on whether they can sell the assets at a higher value down the line, which is by no means guaranteed.
China Huarong is one of four asset management companies established by the Ministry of Finance in 1999 to acquire and repackage bad loans from Chinese financial institutions.
The four companies had exclusive mandates and helped the Chinese government remove bad loans from China's big four commercial banks prior to listing.
China Huarong’s total asset value had amounted to Rmb478 billion by the end of June, 2014. It reported a profit of Rmb11.8 billion for the first half before provisions and expected Rmb20 billion for the whole year, according to the company’s website.
