Bank of Chongqing has raised HK$4.24 billion ($548 million) from the first initial public offering by a Chinese bank in Hong Kong in almost three years, after fixing the price just below the mid-point of the range at HK$6 per share.
The deal did rely quite heavily on the demand from corporates, high-net-worth individuals and the odd institutional investor out of China that was lined up before launch and the majority of the total order amount is believed to have come from these types of accounts.
However, sources said there was also decent interest from Asia-based institutional investors, mostly long-only accounts and hedge funds specialising in Hong Kong and China, as well as a few European accounts. One banker noted that some of these investors viewed the corporate demand as quite “sticky” and felt it might help to support the share price longer-term.
The more widespread view among international investors, though, was that the valuation did not leave enough upside for the stock in the aftermarket. As reported earlier, Chinese regulations stipulate that a state-owned bank cannot sell shares at a price below its latest audited book value and that forced Bank of Chongqing to offer its shares at a premium to its closest comparable and a slim discount versus the Chinese nationwide banks that are already listed in Hong Kong.
According to sources, the final price of HK$6 per share is slightly above the latest audited book value at the end of March this year, and equal to the unaudited book value at the end of June. The bookrunners did market the bank at a forward price-to-book multiple (as of the end of 2013), however, and on that basis, the final price is equal to 0.93 times the book value.
Chongqing Rural Commercial Bank, which is considered the closest comparable among the Chinese banks listed in Hong Kong (it too is controlled by the Chongqing municipal government), is trading at about 0.8 times its projected book value for 2013, according to Bloomberg data. China Minsheng Bank, which like Bank of Chongqing focuses on micro and small enterprises, trades at 1.04 times this year’s book value.
Bank of Chongqing offered its shares at a price between HK$5.60 and HK$6.50, which translated into a 2013 P/B multiple of 0.88 to 0.99 times.
The total demand was underpinned by three cornerstone investors, which bought about $95 million worth of shares. The largest of them was Chongqing Beiheng Investment and Development, a state-owned enterprise involved in real estate development, investments, financial advisory and construction-related business among other things, which took up Rmb400 million ($65.3 million) worth of shares.
It was joined by China Fortune Finance and the National Bank of Canada, which invested $20 million and $10 million respectively.
In addition, Hong Kong-based Dah Sing Bank and Chongqing Yufu Assets Management (Group), an entity wholly owned by the Chongqing municipal government, which each owned about 20% of Bank of Chongqing before the IPO, both participated in the share sale to maintain their current stake. They have also agreed to a three-year lock-up, confirming their long-term commitment to the bank.
These two plus the cornerstones took about 33% of the total deal, one source said. Once you added in the anchor investors, the deal was already covered when the institutional book building started on October 23. When the order books closed at the end of US trading on Wednesday, the coverage ratio had increased to a few times across the range, and a bit less at the final price. There was no information about the number of institutional investors that participated in the transaction.
The response from Hong Kong retail investors was better than in some of the other recent Hong Kong IPOs with a subscription ratio of about 8.5 times. It was not enough to trigger a clawback, however, and the retail investors ended up with 10% of the shares, as initially earmarked for them.
Bank of Chongqing sold 707.5 million shares, of which 670 million were new. The remaining 37.5 million were secondary shares that were sold on behalf of the National Social Security Fund. Together, they accounted for 26.3% of the enlarged share capital.
The deal also comes with a 15% greenshoe, which could increase the free-float to 29% and the total proceeds to as much as $630 million, if fully exercised.
Bank of Chongqing will be the first Chinese bank to list in Hong Kong since the $1.35 billion IPO by Chongqing Rural Commercial Bank (CRCB) in December 2010 and the 10th mainland lender to go public there overall. It is soon to be joined by Huishang Bank, however, which is currently taking orders from institutional investors and is due to price its $1.17 billion to $1.31 billion IPO next Wednesday (November 6) – the same day that Bank of Chongqing is scheduled to start trading.
Like Bank of Chongqing, Huishang Bank was almost fully covered at launch by cornerstones and anchor investors. And, according to sources, most of that demand was coming out of China. On Thursday, the banks working on the Huishang IPO told investors that the deal was “well covered” with demand from a combination of cornerstones, anchor investors and institutional investors.
Bank of Chongqing is a city commercial bank based in Chongqing in the Sichuan province in Southwestern China. Similar to other city commercial banks, it used to count the Chongqing municipal government as its main customer but, according to a syndicate research report, since 2007 it has put increasing focus on micro and small enterprises (MSE) to the extent that this segment currently accounts for about 30% of total lending. The report projects that this will increase further to 50% by 2015.
Goldman Sachs, Morgan Stanley and Bocom International were joint global co-ordinators and bookrunners for the IPO, while ABC International , CCB International and CICC were joint bookrunners.