Following the successful listing of Agricultural Bank of China in Hong Kong and Shanghai four months ago, another Chinese bank is about to join the competition for international investors. Chongqing Rural Commercial Bank (CRCB), which kicks off the institutional bookbuilding today, will be the ninth Chinese bank to go public in Hong Kong, but the first among the country’s city commercial banks, offering investors exposure to a different part of China’s financial markets.
While significantly smaller than the Big Four state-owned banks and the mid-cap national banks listed in Hong Kong, CRCB’s positioning as a market leader in one of China’s fastest growing regions, with key metrics like asset quality, fee income and cost efficiency all coming from a low base, makes it a lender poised for significant growth and improvement, analysts argue. As of the end of June, it had total assets of $39 billion.
CRCB is seeking to raise between HK$9 billion and HK$12 billion ($1.2 billion to $1.5 billion) through an initial public offering arranged by joint bookrunners Morgan Stanley and Nomura. The trading debut on the Hong Kong main board is scheduled for December 16.
The listing comes as global equity markets have become increasingly volatile amid concerns about the lingering sovereign debt crisis in Europe, monetary policy tightening in China and the escalation of hostilities on the Korean peninsula. The change in sentiment has led to a reduction in investor appetite for risk and prompted two Hong Kong listing candidates to call off their IPO plans last week. But fund managers still have quite a lot of cash to put to work and bankers believe they will still be open to invest in market newcomers – only on a more selective basis.
Reflecting that, at least two other companies have also decided to launch their respective Hong Kong IPOs today. Huaneng Renewables, the wind-power unit of one of China’s largest state-owned power producers, China Huaneng Group, is getting on the road with the aim of raising between $1 billion and $1.3 billion with the help of CICC, Goldman Sachs, Macquarie and Morgan Stanley.
And MIE, a Chinese oil and gas company which scrapped an attempt to list in the US in May this year when markets were also very challenging, has decided to brave the elements with an offer of up to $184 million. The bookrunners this time around are BOC International, Deutsche Bank and J.P. Morgan.
However, a third company that was also set to kick off its institutional bookbuilding today, Russian power producer EuroSibEnergo, has decided to postpone the offering until the first quarter of next year. According to sources, the delay is not related to the market environment, but due to a positive development for the company which is to be announced over the next couple of days. Controlled by Russian billionaire Oleg Deripaska, EuroSibEnergo supplies electricity to aluminium producer United Company Rusal -- another Deripaska company that listed in Hong Kong in January. The company had been expected to raise up to $1 billion with the help of six bookrunners: Bank of America Merrill Lynch, BOCI, Credit Suisse, Deutsche Bank, Renaissance Capital, Royal Bank of Scotland and VTB Capital.
The initial interest for CRCB is quite strong, sources say, and the bank has signed up four cornerstone investors that will buy a total of $240 million of stock in the IPO, or between 15.5% and 20% of the base offering. The largest among them is Nexus Capital, which is the investment company of the Abu Dhabi royal family. With a $100 million commitment it shows that Middle Eastern accounts continue to look for investments in Asia. The Qatar Investment Authority and the Kuwait Investment Authority both participated as cornerstones in the H-share portion of Agricultural Bank of China’s IPO in July and the Kuwait Investment Authority had a similar role in AIA Group’s initial share offering in October.
The other cornerstones on the CRCB offering are: Hong Kong-based fund manager Value Partners, which is taking $80 million of shares; Cheng Yu-tung’s Chow Tai Fook; and Taiwan banking group Fubon. The latter two are each buying $30 million worth of shares.
CRCB is offering 2 billion new shares plus a 15% greenshoe that could take the total proceeds to as much as $1.8 billion. Including the shoe, the deal will account for 25% of the total share capital. Of the base offer, 7.5% will be sold to retail investors, while the remaining 92.5% will be offered to institutions. The retail portion can be increased to a maximum 27.5% through a clawback mechanism in case of strong demand. The first clawback trigger will kick in if the retail tranche is more than 10 times subscribed, in which case retail investors will get 10% of the deal. If it is more than 40 times subscribed, the retail tranche will increase to 15%, and if more than 50 times covered, the size will reach the maximum 27.5%.
The shares are offered at a price ranging from HK$4.50 to HK$6.00, which translates into a 2010 price-to-book ratio of 1.65 to 1.96 times pre-shoe, or 1.62 to 1.9 times post shoe, according to sources. Especially at the top end of the range, this is below the joint bookrunners’ fair value estimate of 1.7 to 2.3 times book. And it also pitches CRCB at a discount to the other Chinese bank’s listed in Hong Kong, which trade at an average 2010 price-to-book multiple of 2 times.
Agricultural Bank of China, which priced its H-share IPO at 1.68 times its projected 2010 book value, has risen 27.8% since its listing in mid-July and is now quoted at a price-to-book multiple of 2.1 times. Valuations for the Chinese banks in the A-share market are generally lower and the three city commercial banks that are listed only in China are currently trading at 2010 price-to-book multiples ranging from 1.6 for Bank of Nanjing to 1.8 times for Bank of Beijing and 2 times for Bank of Ningbo. On average, these three trade at a 7% premium to the A-share mid-cap banks and at a 2.3% premium to the Big Four, according to one syndicate research report.
The premium valuation for the smaller banks obviously stems from expectations that they will experience stronger growth than their larger peers and also that they may be less impacted by the government’s aim to curb excessive lending.
CRCB has a leading market share with 14.6% of deposits and 16.6% of loans to small and mid-size enterprises in Chongqing, the only municipality among the four that reports directly to the central government to be located in western China and the prime focus for Beijing’s Go West policy. The municipality, which has about 30 million people and plans to increase the urbanisation rate to 70% by 2020 from 51.6% now, should benefit from economic rebalancing via urbanisation, industrialisation and economic growth and syndicate analysts refer to CRCB as “a concentrated play” on this theme. In 2009, Chongqing’s economy expanded by 14.9% year-on-year and foreign direct investment grew by 47%, compared with a 13% decline nationwide.
Formed through a merger of 38 rural credit cooperative unions at the county level with Chongqing Rural Credit Cooperative Union and Chongqing Wulong Rural Cooperative Bank in mid-2008, the listing candidate still has a lot of exposure to the rural areas of Chongqing, where the potential for higher growth through increased lending is high. The bank is also lagging well behind its larger peers when it comes to fee income, although analysts argue that this will take longer to develop.
The non-performing loan ratio is above that of its peers (3% versus 1.2% for all the H-share banks and 2.3% for Agricultural Bank), although its loan coverage ratio is higher at 148% versus 136% from ABC, and the formation of new NPLs has also been declining over the past three-and-a-half years.
The bank’s short operating history as one entity means the management has a limited track record and investors will have to decide whether they feel it is up to the task of delivering increased cost efficiency and making the most of the growth opportunities.
CRCB’s retail offering will launch on Friday and close on December 8 – the same day as the institutional offering. The final price will be set after the New York close on that day.
