Agricultural Bank raises $19.2 billion from IPO

The offering could still become the largest IPO in the world if the overallotment options are exercised in full.

Agricultural Bank of China (ABC) will raise at least $19.2 billion from its initial public offering after fixing the price on the H-share tranche just above the mid-point of the indicated range. The A-share tranche was priced at the top of the range, but at a discount of about 4.4% versus the H-share offering.

There is still the potential for the combined A- and H-share offering to become the biggest IPO in the world, if the 15% overallotment option (also referred to as a greenshoe) on both tranches is exercised in full. That would bring the total deal size to about $22.1 billion, just above Industrial and Commercial Bank of China's $21.9 billion IPO in 2006. This would be a massive achievement given that ABC has historically been viewed as the weakest of China's big four state-controlled banks, even if the final deal size is below the $25 billion to $30 billion that the bank itself indicated that it hoped to raise a few months ago.

According to sources, the world's largest retail bank -- its 320 million retail customers outnumber the entire population of the United States -- fixed the H-share price at HK$3.20 after offering the shares in a range between HK$2.88 and HK$3.48. The price was near the bottom of the guidance given to investors a day before the pricing, which suggested that the shares would price between HK$3.18 and HK$3.38.

The A-share price was fixed at Rmb2.68 which, based on the exchange rate used in the listing prospectus, translates into roughly HK$3.06 per share.

The company used flexibility to price the H-share portion at a premium to the A-share tranche (by making the H-share range wider to begin with), while at the same time allowing the final price to reflect the fact that valuations of its closest peers have come down over the past week. By not going overboard on the pricing, ABC has given itself a better chance of a good performance in the secondary market when it starts trading in Hong Kong on July 16.

That said, one source acknowledged that there was some price sensitivity in the H-share book, suggesting that ABC may not actually have had the option of pricing much higher than it did. There was no immediate information on how well covered the 95% institutional trance was, but media reports during the bookbuild have suggested that the portion not taken up by cornerstone investors was as much as five times covered and sources said last night that the number of institutional orders was definitely greater than 500. About 46% of the institutional demand was generated out of Asia, 30% came from the US and about 24% from Europe, one source said, although it was unclear whether that split also included the money committed by cornerstone investors.

The 11 cornerstones, led by Qatar Investment Authority which is taking $2.8 billion worth of shares, together bought $5.45 billion worth of H-shares, which, based on the final price, translates into 52.4% of the total H-share offering.

As expected, retail investors, who tend to have a much shorter investment horizon when they buy IPOs and therefore are more affected by market sentiment, were less enthusiastic about the offering than institutional investors and the retail subscription ratio did not reach a level where it triggered a clawback. Retail investors don't have the option to put a price limit on their orders and thus have to be prepared to pay the full price at the top of the range -- which in the case of ABC was getting less and less attractive as other Chinese banks were becoming cheaper.

The retail tranche was a bit more than five times covered, which indicates that Hong Kong public investors submitted orders worth at least $2.8 billion -- well below the record $68 billion applied for in China Railway Construction Corp's IPO in February 2008 or the $63 billion worth of retail orders received by pharmaceutical products distributor Sinopharm, whose $1.13 billion offering in September last year ranks as Hong Kong's second most popular IPO with retail investors.

After years of restructuring and preparations for a public listing, and a three-month dash to get the final details in place, ABC came to market at a time when global investors were again worrying about a slowdown in economic growth. Hong Kong's benchmark Hang Seng Index fell 3.7% during the roadshow and was down on six of eight trading days, while the H-share index dropped 4.7% and the Shanghai Composite Index lost 6.2%. Of course, part of the declines were caused by concerns related to ABC itself and the fact that it was sucking up so much market liquidity, but the cancellation of several IPOs in recent weeks and the reduced pricing on others suggests that there is a bit more to the poor sentiment than that.

Even more important that the drop in the indices was the sell-off in other Chinese bank shares, which reduced the valuation discount that ABC offered. Before a slight recovery yesterday, China Construction Bank (CCB) had fallen 6% since the start of ABC's H-share roadshow, while Industrial and Commercial Bank of China (ICBC) was down 5.9% and Bank of China (BOC) had lost 4.4%.

In the end, ABC priced its H-share offering at 1.68 times its 2010 book value, on a post-money, post-shoe basis, based on the average of the joint bookrunner estimates. This compares with a price-to-book value of 1.54 times for BOC, 2.14 times for ICBC and 2.67 times for ICBC, according to Bloomberg estimates, pitching the newcomer at a premium to BOC, but at a discount of 21% and 37% versus ICBC and CCB respectively.

ABC sold 25.412 billion H-shares, accounting for 8% of the company pre-shoe and 53.3% of the combined A- and H-share offering. Based on the final price, the size of the H-share tranche will be HK$81.3 billion ($10.4 billion), which could increase to $12.0 billion if the greenshoe is used in full.

It also sold 22.235 billion A-shares, representing 7% of the enlarged share capital and 46.7% of the total deal. The final price indicates that the A-share portion will raise Rmb59.6 billion ($8.8 billion), which could increase to $10.1 billion post shoe. The A-shares were offered at a price ranging from Rmb2.52 to Rmb2.68.

The A-shares are scheduled to start trading in Shanghai on July 15, the day before the H-share debut in Hong Kong.

While the deal size may not have ended up being quite as spectacular as ABC had hoped when it mandated the bookrunners in early April -- partly because of macro-economic concerns beyond its control, including the possibility of an increase in bad loans at all Chinese banks following last year's unprecedented lending binge -- there is no question that the bank has come a long way in the past few years. When FinanceAsia published a cover story about ABC in August 2006, just before the listing of larger rival ICBC, the cover image depicted a rather tired-looking tractor being pushed up a muddy hillside by a banker (or a person in a suit and tie anyway), and the story noted that the bank's focus on the backward and impoverished agricultural sector had tempted many observers to marginalise it and had resulted in a "strong urban distaste for the bank."

And with a non-performing loan ratio of 26.2% at the time, according to the bank's own figures, observers understandably had a hard time envisioning a public listing anytime soon.

But that was then. Following an ambitious restructuring and a $139 billion government bailout in 2008, ABC is now viewed as a top investment target, as indicated by the strong line-up of cornerstone investors, which aside from the Qataris also include Kuwait Investment Authority, Standard Chartered Bank and Temasek Holdings. And analysts say the fact that it has a greater focus than ICBC, CCB and BOC on non-urban areas, also referred to as county areas and including large and small towns, municipalities, suburban areas and villages as well as rural areas, is in fact one of ABC's greatest assets, thanks to the stronger GDP growth in these areas.

The fact that ABC has emerged from restructuring only in the past year also means that it now stands to reap the benefits in the form of improved profitability. According to the prospectus, ABC is forecasting a net profit growth of 26% in 2010 and analysts expect a significant improvement on key metrics like cost-to-income ratio, non-performing loans, NPL coverage ratio, and return-on-equity over the next few years, in line with what happened at the other big three banks after they were listed.

China International Capital Corp, Goldman Sachs, Morgan Stanley and ABC's own investment banking arm, ABC International, acted as global coordinators for the H-share offer, with Deutsche Bank, J.P. Morgan and Macquarie joining them as bookrunners.

The A-share tranche was arranged by CICC, Citic Securities, China Galaxy Securities and Guotai Junan Securities.

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