China Zheshang Bank may have launched Hong Kong’s biggest bank initial public offering in more than two years but it is unlikely to provide as much of a litmus test for underlying investor sentiment as initially hoped, given its heavy reliance on cornerstone investors.
Before the Zhejiang-based lender hit the market on Monday, there was little clarity as to whether nervy investors were again warming towards IPOs because of the limited deals seen in Hong Kong since the start of the year. Data from Dealogic shows 11 IPOs have raised just $853 million so far this year, the lowest total covering the same period in five years.
But while Zheshang Bank’s $1.75 billion IPO could potentially raise more than twice that in one single deal, the deal relies heavily on cornerstone investors and is priced very much close to its historical book value – a common structure widely adopted by Chinese banks in the last two years.
Zheshang Bank has lined up five cornerstone investors to subscribe for $963 million-worth of shares, or roughly 57% of the total deal assuming pricing comes at the lowest end of the price range. One of them includes Alipay, the electronics payment unit of Alibaba, which like Zheshang Bank is headquartered in the eastern city of Hangzhou.
Signing up cornerstone investors has been a popular strategy of late in the Hong Kong market because it optimises the chances of a successful float at a time when China’s slowing economy and rising bad debts are weighing on investor sentiment. However, a bank's true value may not be fairly reflected in the share price because it means most of the shares are held in the hands of a small group of investors, who are not allowed to trade their shares until six months after listing.
Initial deal terms include 3.3 billion shares issued at between HK$3.92 and HK$4.12, which will allow Zheshang Bank to raise between $1.67 billion and $1.75 billion, giving the lender a pre-shoe market capitalisation of about $8.9 billion to $9.3 billion.
That equates to approximately 1 to 1.05 times the bank’s book value at the end of last year and 0.85 to 0.89 times its projected 2016 book value, based on the syndicate consensus.
Such valuation indications are in line with the IPOs of Bank of Jinzhou, Bank of Qingdao, and Bank of Zhengzhou in the second half last year.
Corner flag
The cornerstone investors for Zheshang Bank's IPO include Zhejiang Provincial Seaport Investment ($505 million), Yancoal ($202 million), Shaoxing Lingyan Equity Investment Fund ($126 million), Shenwan Hongyuan ($100 million) and Alipay ($30 million), according to a term sheet seen by FinanceAsia.
Despite its small size, Alipay’s cornerstone investment was the most eye-catching contribution.
Bankers said the investment made by the electronics payment unit of Alibaba reinforces its partnership with the Zhejiang-based lender. Zheshang Bank said it has “established various cooperative business relationships with leading nationwide internet enterprises, including Baidu and Alipay.” That includes in relation to Alipay's express payment services, its prospectus shows.
But the fact Alipay has also entered into partnerships with more than 50 other Chinese banks suggests the cornerstone investment is not purely strategic but rather relationship-driven, given that the bank is headquartered in Hangzhou, which is also the home of Alibaba and its founder Jack Ma.
According to the deal timetable, Zheshang Bank is scheduled to conduct management roadshows until March 21 and list on March 30.
The IPO is jointly sponsored by Citic CLSA, CICC, Goldman Sachs, and ABC International.
