A slew of initial public offerings are set to hit the Hong Kong market in the final quarter, continuing the trend of big Chinese financial listings seen since the beginning of the year.
On Monday state-owned bad debt manager China Huarong Asset Management and China Reinsurance Group started pre-marketing their IPOs with fundraising targets of $2.5 billion and $2 billion, respectively.
Together with investment bank CICC’s expected $1 billion listing and Bank of Zhengzhou’s $700 million deal, the quadruple offering will add some $6.2 billion to the $20.3 billion already raised this year from IPOs in Hong Kong.
Including the hefty $4.5 billion raised by Huatai Securities in May and another $3.6 billion from GF Securities a month earlier, six financial institutions have raised a total of $9.8 billion from new Hong Kong listings so far this year.
That accounts for 47.3% of all Hong Kong IPO proceeds raised in the period, according to data provider Dealogic -- a figure that looks set to rise to more than half before year-end, with no jumbo deals from other sectors currently in the pipeline.
For investment bankers preparing to bring IPOs to market, so-called investor fatigue is a concern due to the high amount already raised. So too is the relative lack of differentiation between IPO candidates.
As a result, some have sounded out the market much earlier than usual (as in the case of China Huarong) or are working hard to demonstrate the uniqueness of their clients, according to one Hong Kong-based equity capital markets banker.
China Huarong
China Huarong has been closely tracked by both equity and fixed income investors, having first sounded out a public listing in Hong Kong as early as 2013.
The IPO is also a focus for onshore bond traders because China Huarong has four corporate bonds outstanding plus another five issued through its subsidiaries.
Current indications are that China Huarong will raise around 15% less than initially targeted once its IPO finally emerges at the end of the month. In the wake of China’s summer stock market rout and policy constraints, the nation’s largest distressed asset management company by total assets will likely scale back the IPO to around $2.5 billion, according to a source familiar with the situation.
When it started preliminary preparations in January for the jumbo float, the talk then was of a deal nearer $3 billion.
Shares in China Huarong rival China Cinda Asset Management, the first bad debt manager to list in Hong Kong, have tumbled by as much as 46.5% from their price peak, following a 41% decline in the Shanghai Composite Index after it touched a multi-year peak on June 12. The shares recovered 3.6% on Monday but are still 44% off their May zenith.
The fact that investors will mostly benchmark China Huarong to China Cinda means the former will have to adopt a more conservative valuation in the run-up to the IPO.
In a term sheet seen by FinanceAsia, the company revealed it will sell 16.4% of its enlarged share capital to institutional and retail investors in an initial 95:5 spilt. The offering comprises 5.77 billion new shares and 542.8 million old shares sold by China’s Ministry of Finance and COFCO, one of the pre-IPO investors that took a stake in the company through a private fundraising last year.
If the Hong Kong public offering is more than 100 times oversubscribed the retail portion will be increased to 20% of the entire deal.
As a state-owned company China Huarong is forbidden by the State-owned Assets Supervision and Administration Commission of the State Council, or SASAC, to sell assets below one times price-to-book – a move that would be seen as selling government assets below net value.
Since China Cinda shares currently trade at 0.72 times 2016 price-to-book consensus analyst estimates, it appears China Huarong will inevitably have to sell at a premium to its closest comparable. However, sources familiar with the deal said it will be technically possible to sell at a valuation similar to Cinda by setting the price-to-book benchmark on a historical basis.
China Cinda’s Monday share price close of HK$2.87 values it at 1.18 times book value on a historical basis. Should China Huarong be priced at par to this it will have an implied market capitalisation of $15.5 billion and the IPO will raise about $2.3 billion.
In any case, it is likely that COFCO will sell at a cheaper price compared with when it took the stake last year. COFCO was one of the eight strategic investors that took a combined 21% stake in China Huarong for Rmb14.5 billion ($2.4 billion), or roughly 1.31 times historical book value.
The strategic investors are Warburg Pincus (6.30%), China Life Insurance (5.05%), Citic Securities International (2.42%), Khazanah Nasional (2.31%), CICC (2.29%), COFCO (2.16%), Fosun International (1.53%), and Goldman Sachs (0.45%).
Like other jumbo deals launched at times of heightened market uncertainty, China Huarong has lined up a group of cornerstone investors that will subscribe to approximately half of the deal, according to a source familiar with the situation.
Pre-marketing began Monday and will run through October 15, followed by a management roadshow and bookbuild that lasts until October 22. Trading is slated to begin October 30.
CICC, Citi, Goldman Sachs, HSBC and ICBC are joint sponsors of the IPO.
China Reinsurance
With the spotlight concentrated on China Huarong, China Reinsurance is getting less market attention despite its massive fundraising of $2 billion.
Banking sources, however, told FinanceAsia it may benefit from first-mover advantage as it will be the only reinsurance company to list in Asia.
Global reinsurance is a highly concentrated business dominated by a few industry giants including Swiss Reinsurance, Hannover Ruck SE, and Munich Reinsurance. So as the Chinese insurance industry expands, the government is determined to create a domestic company that can carve out and retain a significant share of this market.
China Reinsurance was jointly set up in 2007 by the State Council, Ministry of Finance, and China Insurance Regulatory Commission. Within six years it was the country’s largest reinsurer with total reinsurance premiums of Rmb47.5 billion ($7.5 billion) as of the end of 2013, according to data from the CIRC.
China Reinsurance, commonly known as China Re, is the only Asian company among the world’s top 10 reinsurance groups. Although most of the group’s business is based in China, a listing in Hong Kong will allow it to attract Asian investors outside the mainland, a person familiar with the deal said.
The absence of other Asian counterparts will also allow more flexibility in pricing for the Chinese reinsurer, the person said.
On a historical basis Munich Re shares are trading at 0.93 times book value while Swiss Re are at 0.81 times book value. But that offers limited insight as to how China Re should be valued due to the distinct jurisdictions of their main operations.
A hedge fund manager FinanceAsia spoke to said China Reinsurance is slightly more investor-friendly in terms of deal structure because it does not involve share sales by existing shareholders, which are commonly viewed as negative for new investors.
China Reinsurance will issue 5.77 billion new shares, equivalent to 14% of its enlarged share capital, according to a term sheet seen by FinanceAsia.
It will continue to be majority-owned by the Ministry of Finance and state-owned investment company Central Huijin after the IPO. They currently own 84.91% and 15.09% of the company, respectively, and will see their shareholding diluted to about 73.2% and 13.0% respectively.
CICC, HSBC and UBS are joint sponsors of the IPO.
