Chinese privatization process hots up as stocks melt down

The award of a mandate to lead China Telecom''s mammoth IPO has co-incided with a dismal end-note to international equity issuance from the Mainland this year.

The award of $5 billion plus mandate to lead what is expected to be the largest ever IPO from the Mainland is reaching its climax, with a final decision expected to be made before Christmas. The three banks that have pushed hardest to float China's dominant fixed line operator - Goldman Sachs, Merrill Lynch and Morgan Stanley Dean Witter - are all preparing to place their big guns in Hong Kong next week to make a final pitch to the Chinese delegation, who will be in the Territory for the ITU's (International Telecommunications Union) annual conference. 

Scheduled to be held from December 4 to 9, the conference under the auspices of the Geneva-based international governmental and private sector organisation will be opened by Wu Jichuan, China's Minister of Information Industry (MII). Wu will make a final decision on the bank to restructure and lead China Telecom to market in association with company president Zhou Deqiang and Li Peng, who moved from China Mobile to China Telecom in August to bring to bear his capital raising expertise in the international equity markets.

However, while a transaction is not expected until next autumn, the mandate decision could not have come at a more inauspicious time. A precipitous collapse in sentiment has pulled virtually all of the year's Chinese equity offerings under water for the first time. Only Petrochina has been able to stay marginally afloat, closing Wednesday one cent above its March 30 issue price of HK$1.28.

The PRC's landmark privatizations have dominated Asia's primary markets this year and, until last week, had seemed to be the secondary market's major salvation as well. Of the 94 straight equity offerings (excluding convertibles) that have been launched over the course of 2000, for example, only eight are now still above issue price.

To date, the region's best performer has been Phoenix Satellite TV. Listed in Hong Kong this June, the company is still up 79.6%, despite coming under heavy selling pressure over the past few days following reports that China is considering changing foreign investment rules for the cable-TV sector. Behind it sits: Beijing Beida Jade Bird, which is up 72.7%; up 64.3%, Wipro up 43%, MTR Corp up 30.5%, Singapore Exchange up 19%, Bank Central Asia up 16.07% and SMRT up 13.9%.

The reports concerning the cable-TV sector, combined with speculation that China is planning tariff cuts across the telecoms sector, have finally pricked the country's latest confidence bubble. Worst affected have been China Mobile and Unicom. The former raised $6.6 billion from a secondary offering at HK$48 per share on October 31. Yesterday (Wednesday), the counter traded down below the HK$40 mark for the first time in a year, before closing at HK$40.30, a 16.1% decline from its recent placement price.

Sinopec, meanwhile, closed yesterday at HK$1.36, an 8.7% drop that marked the stock's sharpest one day fall since listing on October 19 at HK$1.61 per share.

As one ECM specialist puts it, "The question we are all asking ourselves is whether institutional investors are going to be willing to keep sucking up this pain ad infinitum. China had been one of the few star performers in the equity markets and now it seems to be melting down as well.

"Investors have turned their attention back to the issue of trust," he adds. "The basic precept is whether or not they can believe what they are hearing from the regulatory authorities in China and the answer at the moment appears to be no."

Yet, given that next year's large Chinese privatizations will almost certainly dominate the league tables in the same way they have this, the fight to win mandates remains as fierce as ever. Three main IPO's are expected during 2001. China National Offshore Oil Corporation (CNOOC), will come first, with pre-marketing scheduled to begin shortly before Chinese New Year, for pricing in mid to late February.

Credit Suisse First Boston, Merrill Lynch and Bank of China International (BoCI) have the mandate for what was originally expected to comprise a $2.5 billion Hong Kong and New York Stock Exchange listing. Since the company announced its second attempt to access the international markets, however, strategic investors have promised to commit $770 million.

Earlier this month, The Royal Dutch/Shell group said that it hoped to purchase up to $300 million in stock. Prior to this, the company also secured investments from American International Group (AIG), CGU-CDC China Capital Partners, Hong Kong Electric, Hutchison Whampoa and the Singapore Government Investment Corp.

Following CNOOC, bankers then anticipate a four to five month gap before China Telecom and Bank of China are geared up for launch in the fourth quarter. The major contenders to lead the latter to market comprise Goldman Sachs, Merrill Lynch and UBS Warburg, the three investment banks that are also advising BoCI on how to streamline its operations and provide greater competition for China International Capital Corp (CICC). Credit Suisse First Boston is also said to have put itself in the running.

Bank of China is currently seeking regulatory approval to merge and consolidate its Hong Kong operations with up to 11 affiliated banks, four of which are incorporated in the Territory and seven in China. The second largest of the PRC's four dominant state-owned banks and the only one with significant international operations, Bank of China is regarded as the most sellable proposition from the country's unquantifiable banking sector.

As one bank capital expert concludes, "It's very hard for investors to bring capital to the Chinese banking sector and it's going to take many years before capital market discipline is imposed. The main problem is that Chinese bank 'A' shares are grossly overvalued and there is just no liquidity in the collateral market for NPL's. We believe that the country's recently established AMC's (Asset Management Company) are going to find it a real struggle to sell their assets."

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