Bank of Chongqing seeks up to $593m from IPO

As the first Chinese bank to launch an IPO in Hong Kong in almost three years, Bank of Chongqing will be a test of investor appetite amid strict price regulations.
Bank of Chongqing will kick off the management roadshow and institutional bookbuilding for its Hong Kong IPO on Wednesday.
Bank of Chongqing will kick off the management roadshow and institutional bookbuilding for its Hong Kong IPO on Wednesday.

Three weeks into the fourth quarter and Asia's IPO calendar is getting pretty busy. Issuers that have been waiting for the right window to launch seem to be suddenly realising that if they are to finish the year as a listed company they cannot put their plans off any further. And they are joined by a number of other companies that have been planning all along to take advantage of the annual surge in investor appetite in the final few months of the year.

A couple of companies that are already listed, including Kerry Properties and Power Assets, have also recently flagged their intention to release hidden value by spinning off part of their businesses for a separate listing, adding further to the line-up of potential initial public offerings during the remainder of the year.

A quick look at the visible pipeline shows that at least 20 deals are at various stages of the IPO process right now, including a couple of re-IPOs on the back of substantial asset injections. And most of them are expected to try to complete their listings by the end of this year.

The latest listing hopeful to hit the market is Bank of Chongqing, which will kick off the management roadshow and institutional bookbuilding for its Hong Kong IPO on Wednesday. The Chinese lender is seeking to raise between HK$3.96 billion and HK$4.60 billion ($511 million and $593 million) and according to sources the leading banks have lined up a number of cornerstone and anchor investors to make sure the deal will get done.

If successful, it will be the first Chinese bank to go public in Hong Kong since Chongqing Rural Commercial Bank in December 2010.

A couple of people said on Tuesday that assuming all of these order indications come through, the bookrunners should be able to go out with a “books covered” for Bank of Chongqing at or shortly after launch.

The key issue for the bank – and other Chinese lenders seeking to go public – is that Chinese regulations do not allow state-owned banks to sell shares below their latest audited net asset value, or book value. And with most of the listed banks currently trading either below or slightly above book value, this makes it hard for the newcomers to offer their shares at an attractive enough valuation.

Observers have earlier said that the only way for Bank of Chongqing to get done with these restrictions is to place most of the shares with corporate and high-net-worth buyers in China that are willing to overlook the aggressive valuations. The same is true for Huishang Bank, which started investor education for an offering that could exceed $1 billion on Monday this week and is expected to start launch the bookbuilding next week.

Bank of Chongqing will launch the deal with three cornerstones in place that have agreed to buy just under $100 million worth of shares, sources said on Tuesday. Two of them are non-institutional Chinese entities, while National Bank of Canada has agreed to make a $10 million investment.

Most of the rest of the anchor investors are also said to be non-institutional investors with a key focus on Chinese companies and high-net-worth individuals.

Like Huishang, 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 account for about 30% of total lending. The report projects that this will increase further to 50% by 2015.

The bank is looking to sell 707.5 million shares, of which 670 million are new. The remaining 37.5 million (5%) are secondary shares that will be sold on behalf of the National Social Security Fund. Together, these shares will account for 26.3% of the enlarged share capital.

There is also a 15% greenshoe, which could increase the free-float to 29% and the total proceeds to as much as $682 million, if fully exercised.

The shares are offered at a price between HK$5.60 and HK$6.50, which translates into a valuation of 0.88 to 0.99 times the projected post-money book value for 2013. Undoubtedly, the banks are using a forward valuation to make the deal look less expensive, but in reality their hands are tied when it comes to the pricing. Sources said the bottom of the price range is equal to the latest audited book value per share.

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 currently trading at 0.79 times its projected book value for 2013, according to Bloomberg data. China Minsheng Bank, which also focuses on the micro and small enterprises, trades at 1.04 times this year’s book value.

According to a source, one can argue that Bank of Chongqing does deserve to trade at a premium to CRCB as it has a higher return-on-equity, higher deposit growth, higher fee income and a lower non-performing loan ratio. However, that doesn’t take into account that investors typically want an IPO discount in order to commit money to market newcomers.

The research report notes that Bank of Chongqing has lower exposure to local government-related lending than its rural competitor, but its retail business in terms of deposits, loans and income contribution is weaker.

Hong Kong-based Dah Sing Bank owns 20% of Bank of Chongqing pre-IPO and has had a strategic co-operation with it since 2007 aimed at improving corporate governance, strengthening risk management, enhancing overall competitiveness, maximising shareholder returns and facilitating the Chinese lender's transformation into a retail bank, all according to a preliminary prospectus published on Wednesday.

The deal with have the usual split with 10% of the shares earmarked for Hong Kong retail investors and the remainder – in theory at least – targeted at institutions. Standard clawback triggers will also apply.

The order books will close on October 30 and the final price will be determined the following morning, Hong Kong time. The trading debut is scheduled for November 6.

Goldman Sachs and Morgan Stanley are joint global co-ordinators and bookrunners, while ABC International, Bocom International, CCB International and CICC are joint bookrunners.

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