Postal Savings Bank of China (PSBC) completed the world's largest flotation in two years on Wednesday, raising HK$57.62 billion ($7.43 billion) from a Hong Kong Stock Exchange listing that priced just off the bottom of its indicative range.
The 12.106 billion primary share offering was fixed at HK$4.76 per share compared with a range of HK$4.68 to 5.18 times and represents a valuation of 1.03 times March 2016 syndicate consensus price to book and 0.96 times December 2016 forward price to book.
In nominal terms, PSBC's issue represents the world's largest IPO since Alibaba's $25.03 billion deal in October 2014. But the truly notable record comes from the level of cornerstone participation, which stands at an eye-watering 77%, the highest on record for a benchmark IPO.
As such, PSBC's IPO has thrown a spotlight on everything that has gone right and wrong for Hong Kong's equity markets, which remain dominated by China and its desire to raise capital without necessarily paying a market-driven price.
Most notably, the deal will have a freefloat of just $1.71 billion pre-greenshoe and even less after "friends and family" anchor orders are discounted from the institutional order book.
This also means the greenshoe, which amounts to $1.1 billion or 15% of the overall deal, will be almost as large as the freefloat.
Bankers said the situation led many institutional investors to steer clear of the transaction in the primary market so they can play it in the secondary.
If they do so, they will benefit from cheaper dealing costs, since the IPO carried a 1% brokerage fee compared to the sub 0.15% level many institutional funds pay as commissions for secondary trades.
"We're planning to see how this thing moves during the first day or two," said one fund manager. "The greenshoe gives the syndicate a lot of firepower to stabilise the deal, which might provide a good floor for the IPO. Short sellers could potentially get stung."
As with every other Chinese bank deal, syndicate bankers said the pricing strategy was determined by China's rules governing financial sector valuations and the need to price at or above book value. "There was no getting away from the rules and the current reality of secondary market valuations, which are roughly 20% cheaper than the bottom end of PSBC's price range," said one banker.
"Global fund managers are also extremely underweight on the Chinese financial sector right now, although some funds did use this IPO as an entry point again," the banker continued.
The fund manager also added: "The Chinese government isn't particularly interested in benefiting pension investors in the UK, US or wherever. Its primary purpose is to keep the domestic economic juggernaut rolling and if that means creating an artificial valuation when it brings companies to the public markets then so be it as far as it's concerned."
Syndicate bankers said that a sizeable percentage of the institutional book was also allocated to Chinese state owned enterprises on top of the cornerstone tranche.
They noted that passive index investors were not a meaningful presence since the deal's large cornerstone component means the deal may not have a fast track into the MSCI Index. Post-greenshoe, the deal will have a market capitalisation of $50.65 billion, making it one of the largest companies on the Hong Kong Stock Exchange.
"Passive and index fund investors will come later," the banker added.
Bankers said demand in the institutional order book (excluding the cornerstone tranche and Hong Kong public offering) closed around the $10.5 billion level.
They added that the Hong Kong public offering closed about 2.5 to three times covered, which means no clawbacks will be triggered and this tranche will be allocated 5% of the deal.
"If you add retail together with true institutional allocations, then about $1.1 billion of this deal has gone into non SOE hands," one banker concluded.
PSBC is China's fifth largest bank by assets and deposits according to an SWS Securities report, which flags the fact that "PSBC has a similar competitive edge in funding capability like Agricultural Bank of China. In terms of its liability structure, deposits accounted for 90% of its total liabilities compared to the big banks' average of 82% at the end of 2015."
It has the largest distribution network of any bank in the country with 40,047 outlets of which 71% are in rural locations where customers are a lot stickier.
Its stock is scheduled to begin trading on September 28th.
Cornerstone investors for the IPO comprise: China Shipping on 3.42 billion shares; Shanghai International Port Group on 3.3 billion shares; HNA Capital on $1 billion; State Grid $300 million, China Chengton $150 million and Great Wall Pan Asia International $100 million.
Joint global co-ordinators for PSBC's deal were CICC, Morgan Stanley, Bank of America Merrill Lynch, Goldman Sachs and JP Morgan. UBS is also financial advisor.
Joint book runners were Bocom, CCBI, ICBCI, BOCI, Haitong, ABCI, CMBI, First Capital Sun Hung Kari, Essence, CGI, CSCI Nomura, Deutsche Bank, Citic CLSA and Huarong.
