Guangzhou Rural Commercial Bank (GRC Bank) is on course to become the third rural lender to list in Hong Kong after it launched an initial public offering on Monday to raise as much as HK$8.3 billion ($1.1 billion).
Like Chongqing Rural Commercial Bank and Jilin Jiutai Rural Commercial Bank before it, the Guangzhou-based regional lender will hope to distinguish itself from China's large commercial banks thanks to its stronger reach to rural customers and small- and medium-sized enterprises.
At the same time the bank will hope that its extensive network in Guangzhou, capital city of China’s wealthiest Guangdong province, can give it a distinct edge over its peers in Chongqing and Jilin when it comes to attracting investors.
Northeast China lender Jilin Jiutai Rural raised just under $330 million from an IPO in January, some six years after Chongqing Rural became the first mainland rural commercial lender to list in Hong Kong. Such rural financial institutions were mostly developed from credit unions or cooperative economic organizations and have been tasked with supporting agricultural development and serving farmers in less-developed regions since the 1990s, when the big state-owned banks were asked by the regulator to withdraw from rural areas to focus on supporting large corporations.
GRC Bank, for example, was founded in 1951 as Guangzhou Rural Credit Union before becoming a legal entity in 1998.
As of the end of last year, GRC Bank ran 618 outlets in Guangzhou and had a 10% share of the city’s total deposits, Chinese central bank data shows.
Premium valuation
GRC Bank's IPO provides international investors with another opportunity to invest in China’s less developed regions after the floatation of Postal Savings Bank of China (PSBC) last year and Jilin Jiutai Rural Commercial Bank's more recent IPO.
This kind of investment generally comes with higher risks but offers higher returns over the long term. As such, prospective investors usually don't expect an immediate jump in share price post-listing and will tend to hold the stock for a longer period.
A similar outcome probably awaits GRC Bank, not least because it is selling shares at a double-digit premium to most of its competing banks.
GRC Bank is a state-owned lender that counts Guangzhou municipal government as its largest single shareholder. State-owned financial institutions are forbidden by the China Banking Regulatory Commission to sell assets below their last reported book value.
The lender is pitching the 1.58 billion-share deal at a price-to-book ratio of 1 to 1.06 times, based on reported figures as of the end of last year, and at 0.92 times to 0.96 times its expected book value by the end of this year, according to a source familiar with the offering.
The official price range is set at HK$4.99 to HK$5.27 per share.
Using forward-looking figures, GRC Bank will be valued at a 21% premium to Chongqing Rural Commercial Bank, which currently trades at 72% of its book value on a rolling 12-month basis. Its valuation is also about 9% richer than PSBC's, which has a much larger retail network and better asset quality.
Cornerstone investors and timetable
But in any case, GRC Bank will only require public investors to cover about 59% of the IPO since it has already secured commitments from three cornerstone investors.
HNA Aviation and Aeon Life Insurance, a life insurer backed by Chinese property group Dalian Wanda, will each invest $194.5 million in the IPO, according to a term sheet seen by FinanceAsia. International Merchants Holdings, an entity partially backed by Chinese payment technology company Geoswift, will commit about $40 million.
The total cornerstone investment amounts to $429 million and accounts for about 41% of the entire deal on a pre-greenshoe basis. There will be a 92.5%/7.5% split between institutional and retail investors.
According to the deal’s timetable, GRC Bank will price the IPO on June 13 and the shares will start trading on June 20.
Joint sponsors of the IPO are CICC, China Merchants Securities, CCB International and ABC International. They are also joint bookrunners with AMTD, BOC International and CMB International.
