Huarong's $2.5b IPO leans on cornerstones

Ten mainly Chinese state-backed cornerstone investors have committed $1.6 billion for approximately 70% of the shares on offer.

China Huarong Asset Management, the country's largest "bad bank" by assets, is leaning heavily on cornerstone investors to ensure its $2.5 billion initial public offering later this month gets away without a hitch.

As the global roadshow for the IPO began on Thursday, a term sheet seen by FinanceAsia showed 10 cornerstone investors committing $1.6 billion for approximately 70% of the new shares on offer, potentially breaking the market's previous record for a large deal.

China Huarong's IPO is the biggest deal to hit the Hong Kong market since the summer's sharp, disorderly retreat in Chinese shares, and the reliance on mainland Chinese cornerstone investors offers some testament to the still-shaky state of broader investor confidence.

All the cornerstone investors, mostly Chinese state-owned organisations, have agreed to a lock-up period of six months.

“It is a trend that Chinese SOEs are more willing to support mainland [company] listings in Hong Kong,” one source familiar with the bookbuilding process told FinanceAsia. “Huarong is a big name and it’s state-owned. It is natural to attract interest and support from Chinese corporations and individuals.”

Heading the list of China Huarong’s cornerstone investors are Fabulous Treasure Investments, a unit of the state-owned property developer Sino-Ocean Land, which promised $684 million, and State Grid Yingda International Holdings, a subsidiary of the nation’s largest power distributor – State Grid Group – which pledged $300 million.

“Sino-Ocean invested in us is because they are optimistic [about] our prospects,” China Huarong’s chairman Lai Xiaomin said at a press conference on Thursday. “Much of Huarong’s bad debt business is related to properties. We have the foundation to work with Sino-Ocean.”

China Huarong's distressed real estate assets as of end-June amounted to Rmb137 billion ($22 billion), or 65% of its total distressed assets, according to the company's last financial statement.

Other cornerstones devoting $101 million each are Shenzhen-based Foresea Life Insurance, state-owned Zhongrong International Trust, and Rich Precious, a firm backed by Hong Kong business magnate Albert Yeung.

The New Hampshire-based Harvest Capital Management is the only international cornerstone investor, allocating $50 million to the state-owned bad debt manager.

China Huarong is selling about 5.77 billion new shares, or 15% of its shares post-IPO, at a price range of between HK$3.03 and HK$3.39.

Depending on the final offer size, the deal is worth up to $2.52 billion pre-shoe, rising to $2.9 billion if a greenshoe option is exercised. Cornerstone investors could take up between 64.1% and 71.7% of the total shares.

If they end up with a higher percentage, China Huarong would break 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.

Haircut

China Huarong also trimmed the size of the deal having originally planned to sell 6.31 billion shares, combining new shares and part of existing shareholdings owned by China’s Ministry of Finance and state-owned grain trader Cofco, according to an earlier term sheet seen by FinanceAsia as well as a source with knowledge of the matter.

When asked why two existing stakeholders had changed their minds at the press conference, Wang Lihua, vice president of China Huarong, only said that the Ministry of Finance “never planned to reduce the shareholding” in Huarong.

China Huarong’s upcoming floatation will add to the $21 billion already raised through IPOs in Hong Kong so far this year, with 90% pocketed by mainland Chinese companies, according to Dealogic.

The price range of HK$3.03 to HK$3.39 values the “bad bank” at 0.96 to 1.05 times its forecast end-2015 book value and at 1.0 to 1.1 times its book value as of the end of June, said another two sources familiar with the deal.

China Huarong’s closet comparison – China Cinda, the first Chinese distressed debt manager to go public in Hong Kong in late 2013 – currently trades at a price-to book ratio of about 0.99 times. Its share price closed at HK$3.12 on Thursday, which represents 0.87 times its forecast 2015 book value.

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

Cinda also signed up 10 cornerstone investors that invested a total of about $1.1 billion, taking up about 45% of the offering.

But unlike now, close to half of Cinda’s cornerstone demand came from international institutions, including distressed asset specialist Oaktree Capital Group and the American hedge fund Och-Ziff.

“When you compare the cornerstone lists of Huarong and Cinda, you can tell at the first glance [that] Cinda’s cornerstones were more gaodashang,” a Hong Kong-based fund manager told FinanceAsia, using a popular Chinese-language acronym for high-end and classy.

Huarong will begin taking institutional orders from October 15 until October 22, with a target to list on October 30.

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

Additional reporting by Danny Leung

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