China Huarong Asset Management has joined the long queue for an A-share listing, seeking fresh capital to fund its expansion as the economic slowdown in China begins to bite, creating new opportunities to acquire distressed assets.
The company’s board approved the plan to apply for an A-share offering on Shanghai’s stock exchange when it met on June 24, said China’s largest financial asset management company by total assets in a stock exchange filing in Hong Kong.
Huarong is one of the country's four state-owned bad-asset managers and was set up during the banking crisis of the late 1990s to remove non-performing loans from the banking system.
China's economic slowdown creates ample opportunity for Huarong to buy distressed assets. At the same time, though, it makes it harder for the companies in its portfolio to service their debts.
The company’s management has signalled it wants to reduce its reliance on wholesale funding, which leaves it more exposed to potential shocks in global money markets, such as could conceivably develop from a Brexit.
According to the company filing, the offering will comprise no more than 6,895 million shares, or 15% of the Huarong's enlarged shareholder base. This is also the minimum issuance size in Shanghai.
“We think a potential A-share listing would create an alternative channel to replenish capital and fund growth in the medium term,” Nan Li, an equity analyst at Goldman Sachs, said in a Monday note to clients.
However, Huarong’s Shanghai listing will be held hostage to the large pipeline of initial public offerings in China waiting for approval from the securities regulator, the China Securities Regulatory Commission.
The asset manager’s planned share sale comes at a time when the Chinese regulator has slowed the pace of approvals for new offerings, curbed the size of new deals, and tightened the rules over so-called backdoor listings to support market liquidity and tamp down the speculation frenzy in unprofitable, listed shell companies.
Dealogic data shows that 60 Chinese companies have raised a combined $4.5 billion so far this year by issuing A-share IPOs – an 81% drop on the same period last year.
Able to wait
Generally stock market analysts think Huarong can afford to wait.
The company has issued bonds in offshore markets since 2014 and has also started to issue bonds domestically. The bad-loans manager raised $2.5 billion through the sale of a popular three-part bond offering in late May.
As of December-end, following its H-share IPO, Huarong’s capital adequacy ratio stood at 14.75% at the parent company level versus the 12.5% regulatory minimum and the 16.11% at rival China Cinda Asset Management.
“We expect its A-shares listing to further improve its capital position, enabling the company to further grow in its core debt asset management business lines,” said analysts at Jefferies in a separate note.
The proposed offering size could potentially improve Huarong’s capital adequacy ratio by 4-6 percentage points, Jefferies estimated.
“We consider the company’s current capital position as comfortable, although we think it might face modest pressure in 2018,” Goldman’s Li said.
