China Huarong may delay $3b Hong Kong IPO

The deal has now won approval but could be delayed by China's fraught stock market conditions and the poor performance of peer China Cinda.

China Huarong Asset Management, the country’s largest bad-debt manager, won approval from the Hong Kong stock exchange for its long-awaited initial public offering late last week, according to three sources familiar with the matter.

But the potential $3 billion deal could be delayed by several weeks because investors have lost some of their appetite for mainland Chinese companies, even Chinese state-owned enterprises, in the wake of China's recent share slump, the sources said.

“Huarong originally planned to list in mid or late September,” one of the sources said. “Now it might list only after mid-October, given the current [bad] market conditions and poor market performance of China Cinda.”

Shares in China Cinda Asset Management, which listed in Hong Kong in December 2013 and is a key comparable for Huarong, are now trading below their IPO issue price, having fallen more than 40% from their late Spring peak, much like the Shanghai Composite index. The Hang Seng index has also been adversely affected, losing about a quarter of its value over the same period.   

Huarong officials could not be immediately reached for comment.

While it is too early to provide guidance on Huarong’s potential valuation, sources familiar with the matter said the company would very likely benchmark itself against Cinda.

Based on its final IPO price of HK$3.58 per share and the joint bookrunner consensus forecasts at the time, Cinda was valued at 1.3 times its 2013 book value and 1.15 times its 2014 book value.

However, having peaked in late May at HK$5.23, the company's share prices began sliding on news of its bid for the Hong Kong lender Nanyang Commercial Bank, which is expected to be sold for about $8.8 billion. Cinda now trades at about 0.88 times price-to-book and its stock closed down at HK$2.88 on Monday.

“Cinda’s current price makes it difficult for Huarong to have a good valuation [if the IPO kicks off soon],” said a second of the sources familiar with the matter, adding that as a SOE Huarong “cannot be valued below one times book value”.

According to a rule imposed by China's State-owned Assets Supervision and Administration Commission, the issue price of an SOE's IPO cannot be lower than its net asset per share valuation.

“Otherwise, it will be like selling state-owned assets cheaply,” the second source said. “No one can take the responsibility for the loss of state-owned assets.”

Big four

Established in 1999, Huarong is one of four asset management companies set up by the Ministry of Finance to acquire bad loans from Chinese financial institutions at discounts in order to repackage them for sale.

The four companies have exclusive mandates and helped the Chinese government to take bad loans of the books of China’s big four commercial banks, prior to their listing.

According to the listing prospectus filed by Huarong with the Hong Kong stock exchange, the distressed debt business has been profitable for the company.

Last year, this core business made a profit of Rmb9.3 billion ($1.46 billion), up 22% on 2013. Overall, Huarong made a Rmb13 billion ($2.04 billion) net profit in 2014, up about 30% on the previous year.

Huarong plans to use the funds raised from the IPO to further develop its distressed-assets management as well as for its financial services and investment businesses, its prospectus shows.

The bad-debt manager has appointed CICC, Citi, Goldman Sachs, HSBC, and ICBC International as co-sponsors to arrange the transaction. 

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