China Huarong's $2.3b HK IPO is bittersweet

The distressed debt house's float is weak compared to peers, but the successful completion on the back of cornerstone commitments is key to Beijing's market liberalisation plans.
Lai Xiaomin, chairman of China Huarong
Lai Xiaomin, chairman of China Huarong

China Huarong Asset Management, the country’s largest distressed debt management company by assets, completed its initial public offering in Hong Kong, listing shares at a mere 2% premium over its historical book value -- the lowest ever by a state-owned financial institution.

China Huarong on Thursday raised HK$17.8 billion ($2.3 billion) by selling 15% of its enlarged share capital to investors at HK$3.09 per share. The company’s market capitalization of $15.3 billion equates to 1.02 times book value as of the end of June.

During the management roadshow China Huarong approached investors with an indicative price range of HK$3.03 and HK$3.39, but eventually the bad debt manager could only lift the offer price slightly off the bottom of the range as investors showed price sensitivity towards the deal.

Pricing pressure also arrived via China Cinda Asset Management, a China Huarong competitor with an almost identical business model. China Cinda is currently trading at 0.89 times book value in the secondary market.

“Investors will have every reason to hesitate and ask why they are paying a 10% premium to get what is already available in the market,” an ECM banker away from the deal said. “The market is not as favorable now compared with two years ago when China Cinda listed.”

One source close to the situation admitted most institutional investors showed sensitivity towards pricing, although Chinese investors – including the 10 cornerstone investors signed up before deal launch –  are less concerned with final pricing.

While the deal did not attract blockbuster demand it was still well-covered with a total of over 100 accounts in the final book, including a mixture of long only- and hedge funds as well as corporates. At the end allocations were particularly skewed towards large orders with the top 10 investors allocated over two thirds of the shares offered in the institutional tranche.

However the biggest subscribers to China Huarong’s IPO remain the cornerstone investors, taking up 70% of the $2.3 billion worth of shares. Leading the pack was Fabulous Treasure Investments, a unit of the state-owned property developer Sino-Ocean Land, which committed $684 million to take up nearly 30% of the deal.

In percentage terms China Huarong has broken the record set by China Railway Signal & Communication for cornerstone allocations in a single Hong Kong IPO worth more than $500 million. The railway control system developer, which listed in August, allocated 67% of its shares to cornerstone investors, according to Dealogic.

The retail offering is roughly three times subscribed and there was no clawback triggered.

China Huarong is expected to list on October 30.

CICC, Citi, Goldman Sachs, HSBC and ICBC are joint sponsors of the IPO.

State mission

China Huarong’s IPO has elevated the use of cornerstone investment to a new level and industry experts expect the trend to continue particularly on IPOs of state-owned enterprises.

“To the government it is a matter of whether it can be done, rather than at what price,” the ECM banker away from the deal said. “They do not care much over how much the IPOs can raise, but rather if they can be completed on schedule so that the government can proceed with other market liberalisation plans.”

As such commitments from cornerstone investors are necessary to minimise the potential of a failed deal. Increased participation of cornerstone investors provides a greater level of protection at times of market uncertainty, but it is also a signal to the public of how determined the central government is to get them done, the source said.

China Cinda’s listing in late 2013 and China Huarong’s flotation are in keeping with Beijing's aim to open the increasingly competitive distressed debt market through the introduction of private capital.

The reliability of players like Cinda and Huarong to act as financial stablisers has been called into question. The central government believes the listing pocess will serve to increase the operational efficiencies of bad debt managers, which are essential to maintaining both government and local debt as a percentage of GDP at a healthy level.

 The government has given priority to ensuring that China’s economic growth is not derailed by debt.

To this end it is widely expected that China will list two other state-owned distressed debt houses, China Great Wall Asset Management and China Orient Asset Management, in order to achieve its objectives.

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