Cornerstones to invest $516m in Huishang Bank IPO

The up to $1.3 billion deal was largely covered by China-based accounts pre-launch, highlighting once again the selective interest in new listings by institutional investors.
The launch of Huishang Bank’s initial public offering comes as the Hong Kong IPO market continues to pick up steam.
The launch of Huishang Bank’s initial public offering comes as the Hong Kong IPO market continues to pick up steam.

The launch of Huishang Bank’s initial public offering on Tuesday comes as the Hong Kong IPO market continues to pick up steam with several deals due to price this week and next, and with a pipeline of other potential listing candidates busy preparing in the wings.

The bank is aiming to raise between HK$9.07 billion and HK$10.14 billion (US$1.17 billion and US$1.31 billion) and looks set to become at least the third largest new listing in Hong Kong so far this year behind Sinopec Engineering and China Huishan Dairy, which raised $1.8 billion and $1.3 billion respectively.

However, the deal also shows the heavy reliance on Chinese investors in order to get new listings done these days and comes with a stark reminder that institutional investors remain selective about where they put their money.

Like Bank of Chongqing, which kicked off the bookbuilding for its Hong Kong IPO of between $511 million and $593 million on Wednesday last week, Huishang Bank was almost fully covered at launch when adding committed anchor investors to the official cornerstone tranche. And, according to sources, most of that demand is coming out of China.

The city commercial bank, which is based in the Anhui province just west of Shanghai, has attracted five cornerstones that will take up about $516 million worth of shares at the bottom of the price range, equal to about 44% of the base deal.

By far the largest among them is one of China’s biggest property developers, Vanke Property, which has agreed to buy 884 million shares, an investment of between $396 million and $442 million depending on the final price. This will make Vanke one of the bank’s top shareholders with an 8.3% stake at the time of listing.

A second Chinese developer, Peaceland, will buy 124 million shares, an investment of between $55 million and $62 million, while Beijing-based Genertec Capital will invest $30 million and a Ms Kan Hung Chi will put up $10 million.

Finally, Chow Tai Fook, the private investment arm of New World Development chairman Cheng Yu Tung, has committed to take $26 million worth of the shares.

Property developers Hydoo International Holdings and Jingrui Holdings, which have completed their IPOs in the past few sessions, used the same approach although sources said Hydoo did amass a decent amount of orders from non-Chinese institutions during the bookbuilding.

Both property companies were offered at what can only be described as a cheap valuation, but with a myriad of other Chinese real estate companies that are already listed in Hong Kong, it seems many investors didn’t think the low price was enough reason to take a bet on an untested name.

For the Bank of Chongqing and Huishang Bank the situation is almost the opposite. As city commercial banks in provinces with good growth characteristics they are offering a slightly different story to the larger nationwide banks, and for investors who want to tap those regions, they are “not a bad play”, as one banker put it. Amid the renewed focus on non-performing loans and another potential credit crunch in China they too face their fair share of challenges, however.

But the key issue for the Chinese banks, and the key reason why the global coordinators have been so keen to line up demand in advance, is that Chinese regulations are forcing them to offer their shares at a valuation that is on par – in some cases even a premium – to their closest comparables.

As noted in our earlier story on Bank of Chongqing, state-owned banks are not allowed to sell shares below their latest audited net asset value, or book value, and since most of the Hong Kong-listed Chinese banks are currently trading either below or only slightly above book value, that constraint makes the newcomers significantly less attractive – at least at first glance.

Particularly since international investors are used to getting an IPO discount to partly offset the risk of making a bet on a new name as well as the one-week lag between pricing and listing in the Hong Kong market.

According to sources, Huishang Bank is being as generous as it can with the price range set at 1 to 1.1 times its net asset value at the end of June. For obvious reasons, bankers are preferring to market it at forward multiples, however, and the same range translates into price-to-book multiples of approximately 0.9 to 1 times for 2013 and 0.8 to 0.9 times for 2014.

Bank of Chongqing did exactly the same, setting the bottom of the price range at one times its latest audited book value and at 0.88 to 0.99 times its projected post-money book value for 2013.

By comparison, Chongqing Rural Commercial Bank, which was the latest Chinese bank to go public in Hong Kong in December 2010, and is also considered a close comparable because of its size and geographical focus, is currently trading at about 0.8 times its projected book value for 2013, according to Bloomberg data. China Minsheng Bank trades at about 1.04 times.

Huishang Bank terms
Huishang Bank is looking to sell approximately 2.61 billion H-shares, of which 95.7% are new, at a price between HK$3.47 and HK$3.88 apiece. The secondary shares will be sold on behalf of the National Social Security Fund (NSSF).

The base deal accounts for 24.5% of the enlarged share capital. There is also a 15% greenshoe that could increase the deal size to 27.2% of the share capital and the total proceeds to as much as $1.5 billion. The greenshoe will have the same split between new and existing shares as the base deal.

The offering will also have the usual 90/10 split between institutional and retail investors and standard clawback triggers will apply.

Having initially planned to do an accelerated bookbuild over just four days, the management has decided that it wants to do a proper roadshow and meet potential investors in the UK and the US as well – even though the likelihood of significant demand from either of those markets does seem pretty slim.

As a result, the institutional order books will now stay open until Tuesday, November 5. The Hong Kong retail offering will launch on Thursday, October 31 and close at the same time with the final price due to be fixed the following morning Hong Kong time. The trading debut is scheduled for November 12.

That puts it almost a week behind Bank of Chongqing, which is due to price its offering on Thursday, October 31 and start trading on November 6.

Huishang Bank has 199 outlets across the 16 cities in the Anhui province as well as in Nanjing in the neighbouring province of Jiangsu. Like Bank of Chongqing, which is based in Chongqing in the Sichuan province, it focuses primarily on small and medium-sized enterprises.

In the three-years to 2012, Huishang Bank boosted an above-average compound annual growth rate of 26.2% in net profit and outperformed all the Chinese commercial banks listed in Hong Kong in terms of non-performing loan ratio in the same period, its preliminary prospectus shows. As of the end of last year, its non-performing loan ratio was 0.58%, compared with an average 0.81% for all Chinese city commercial banks.

At the end of June, it had total assets of Rmb409.59 billion, which was up 26% from six months earlier.

According to a syndicate research report, Anhui province has experienced rapid economic growth since 2006 and, compared to some other fast-growing regions that heavily on infrastructure and property investment, it has a more balanced economic structure with more growth coming from household consumption and industry- and services-related investment.

BOC International, Citic Securities, JP Morgan, Morgan Stanley and UBS, which are joint sponsors of the IPO, have been named joint global coordinators and bookrunners as well and are effectively leading the deal, sources say. The rest of the syndicate is less clear. Some sources say that as many as 19 banks are sharing the bookrunner role, while others say at least 17 banks are on the list, putting Huishang in the same questionable group as PICC and China Galaxy Securities when it comes to the number of mandated banks.

The property IPOs
Meanwhile, Jingrui Holdings, a regional property developer in the Yangtze River Delta, raised HK$1.39 billion ($179 million) from its Hong Kong IPO after fixing the price at HK$4.45 per share on Monday. This was in the lower half of the HK$4.20-HK$5.48 range and translated into a 67% discount to NAV and a 2013 price-to-earnings multiple of 4.1.

The company had secured one cornerstone before launch; China and Southeast Asia-focused private equity firm RRJ Capital, which had committed to buy $50 million worth of shares. And sources said that, including anchors, the deal was covered on the first day.

The final order book was said to comprise mostly friends and family type-investors, a term often used to describe China-based high-net-worth individuals and corporate investors, complemented by a small number of institutions. The retail tranche was fully covered, although sources said the subscription ratio was less than two times.

Deutsche Bank and UBS were joint global coordinators, while Bocom International and Haitong International joined them as bookrunners. Jingrui is due to start trading on October 31.

Hydoo will debut on the same day. The company, which specialises in the development of large-scale trade centres, priced its Hong Kong IPO at the mid-point of the range last Friday for a total deal size of HK$1.65 billion ($213 million).

The final price of $2.15 per share represents a 62% discount to NAV and a 2013 P/E multiple of 2.9 times.

Some $130 million worth of shares were bought by 11 cornerstones investors, all of which were Chinese. In all, about 120 accounts came into the transaction, including some China-focused long-only funds and Asia-based hedge funds. The retail offering was about three times covered, sources said.

The greater interest in Hydoo compared to Jingrui may have been partly due to its more differentiated business focus, but the company is also offering a pretty high dividend yield which made it attractive to yield-focused funds in Europe, one source said. Based on an expected payout ratio of 40%, then 2013 yield will be about 8.3%.

Morgan Stanley and UBS were joint global coordinators with ABC International, Bocom International, CIMB, China Merchants Securities and ICBC International acting as joint bookrunners.

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