BoCom launches $267m IPO of offshore unit

The listing of BoCom International is set to be the first offshore investment banking spin-off by a state-owned Chinese bank.

Bank of Communications (BoCom), China’s fifth-largest lender by assets, started bookbuilding for a HK$1.7 billion to HK$2.1 billion ($233 million to $267 million) initial public offering of its offshore securities brokerage and investment banking subsidiary BoCom International on Friday.

After anticipating a deal worth around $200 million during premarketing, the lender has ended up pitching a deal that could be over 50% larger. It could be worth just over $305 million if the 15% greenshoe option is exercised in full.

It is uncertain whether that will happen, but it does not seem likely at this point. That is because the lender has launched the transaction at a tricky time, when Hong Kong stocks appear to have lost momentum after a four-month rally.

At midday Friday, Hong Kong’s benchmark Hang Seng Index dropped 1.2%, or 286 points, in the steepest decline in the morning session so far this year. That was after three consecutive trading days when the index remained largely unchanged, putting an end to the strong run since last December.

Due to BoCom International’s business nature, the weakening stock momentum will potentially have an outsized impact on investor appetite for the IPO. The company generated 46.4% of its revenue from securities brokerage and margin trading last year, and any deterioration of wider market sentiment and trading volume could seriously impact its earnings.

Still, BoCom is kicking off the share sale at a time when the market has risen 16% from July last year, when FinanceAsia first reported its intention to spinoff the unit for a separate listing in Hong Kong.

In addition, the deal was launched at a relatively quiet period for Hong Kong IPOs. With only one major IPO executed in April — from China Everbright Greentech — and amid worsening sentiment in the secondary market, prospective investors could be enticed into the primary market in search of short-term gains.

BoCom International’s 666 million-share IPO is being pitched at between HK$2.6 and HK$3.1 per share. The company is selling 25% of its enlarged share capital on a pre-greenshoe basis, or 27.71% after the greenshoe.

According to syndicate bankers, BoCom International will be valued at a 30% to 56% premium to its book value as of the end of last year. On a post-money basis, that represents a price-to-book multiple of between 1.15 and 1.3 times for the 2017 financial year.

This implied valuation suggests BoCom International will be close to Guotai Junan International — which is currently trading at a 57% premium to book — if it prices the IPO at the most aggressive end. The company has clearly not benchmarked itself against Haitong International, which was trading at par to its book value on Thursday.

BoCom International has already secured five cornerstone investors who will take about 34% of shares offered in the IPO, assuming pricing at the mid-point.

The cornerstone investors include three money managers, namely Kaiser Private Equity Fund, which has pledged $30 million; Da Cheng International Asset Management, which will invest $10 million; and China Taiping Insurance, which will take $7.8 million of the deal. Da Cheng is investing on behalf of China’s National Social Security Fund, according to a deal termsheet.

Shanghai-listed Shandong Gold Group and Po Shing Woo, a director of Sun Hung Kai Properties and a non-executive director of Henderson Land, have pledged to invest $10 million and $20 million, respectively.

Some 90% of the IPO will be sold to institutional investors, with the remaining 10% offered to retail accounts before any clawback. The deal is scheduled to price on May 11 with BoCom International then listing on May 19.

The sponsors of the IPO are BoCom International, CICCHaitong International and China Securities International.

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