ICBC starts pre-marketing of mega IPO

The company secures $3.5 billion from 15 corporate investors to set the deal off to a good start.
You could argue that investors will have to buy shares in Industrial and Commercial Bank of China (ICBC) simply because of its sheer size and its position as a market leader in most of its key product areas.

There is also a feeling among investors that so much ôfaceö is riding on ICBC's role as the first company to be allowed to carry out a simultaneous dual listing in Hong Kong and China that it wonÆt be allowed to fail û making it an investment with virtually no potential downside near-term.

However, pre-deal research published by syndicate analysts at the start of pre-marketing yesterday stresses that while being big in a big and fast growing market is certainly positive û ICBC does have unmatched customer reach in China û it is things like the bankÆs focus on newer and more profitable segments of the market, including non-credit income streams, its lower funding and operating costs, its decision to focus on wallet share rather than on loan growth, and its superior IT system that make it stand out.

One of the reports even notes that the above points make ICBC resemble Hongkong Bank, the Hong Kong unit of HSBC, which is an argument that should hit home with investors. Many Hong Kong retail investors make regular monthly investments into that stock in return for gradual long-term growth and a decent dividend, while HSBC is also a staple in many institutional portfolios.

At the end of 2005, ICBC had total assets of $800 billion, which represented 16.8% of the total assets held by all banks in China and 31.4% of those held by the big four state-owned banks. Its loans and deposits totaled $407.6 billion and $710.9 billion respectively, representing a 30.4% and 32.6% share of loans and deposits at the big four.

Two syndicate analysts project ICBC to post a 2005-2008 compound annual growth rate in net profit of about 29%, which is in line or higher than its peers. It is also roughly in line with the bankÆs own forecast for a 2006 profit of at least Rmb47.2 billion, or 14 fen per share, which represents an increase of 25.7% over last yearÆs Rmb37.56 billion, according to an information document published on the Hong Kong stock exchange's website.

Such projections are not without risks, however. Among the most frequently listed concerns are a potential deterioration in ChinaÆs macro economic environment or a slowdown in the pace of regulatory reform, while company-specific risks include a ôstill-highö gross new NPL formation ratio of 1.3% in the first half which was accompanied by special mention loans at 8% of the outstanding loan stock, earnings setbacks from weaker-than-expected fee income or loan growth, and downward pressure on net interest margins.

One observer also notes that ICBC has maintained a more stable management than its peer over the past 30 years, adding that ôif there was a change in senior management, we may have cause to alter our forecasts materiallyö.

This analyst goes on to note that while the bank has made significant changes to its risk management process, these new processes remain untested in a weak operating environment and as such ôtheir effectiveness in preventing credit, market and operational risks cannot be fully determinedö.

The same is true for the NPL situation, which has improved significantly in the context of strong economic growth (and following a carve-out of Rmb705 million worth of bad loans in 2005), but which has yet to face the test of an adverse economic environment. In this respect though, ICBC is no different from the other Mainland lenders.

In the first half of this year, ICBCÆs NPL ratio improved slightly to 4.10% of outstanding loans from 4.69% in 2005 and 21.16% in 2004. Meanwhile, the bank increased its allowance for bad loans to 60.37% as of June this year from 54.2% in 2005.

In the information document, ICBC confirmed its already well-publicised plan to sell 35.4 billion H-shares, or 10.8% of the company, to global investors, including a 5% portion set aside for Hong Kong retail investors. Of the total, 80% will be primary shares, while 20% will be made up from existing shares.

It will also offer 13 billion A-shares, which equals 3.97% of the enlarged share capital, to China-based investors. Both the H-share offer and the A-share offer, which are not conditional upon one another, have a greenshoe that can increase the number of shares on offer by 15%.

CICC, Credit Suisse, Deutsche Bank, ICEA and Merrill Lynch will act as joint bookrunners on the international portion of the deal, while the A share sale will be arranged by CICC, CITIC Securities, Shenyin & Wanguo Securities and Guotai Junan Securities.

On a pre-grenshoe basis, the combined offer could raise as much as $19 billion, although the price range wonÆt be set until close to the launch of the official roadshow on October 8 with the final price to be determined on October 20 û one day after the books close. According to the information document, the price on the H share and the A share offerings will be the same, adjusted for the exchange rate.

Some fund managers say due to the size of the deal (it has the potential to surpass NTT DoCoMoÆs $18.4 billion 1998 offering to become the worldÆs largest IPO ever), it will need to offer a sizeable discount to its listed peers, which on average trade at about 2.4 times their forward book value.

One observer says investors are likely to want at least a similar discount to that fetched by Bank of China in its May IPO. BOC, which still represents the largest listing in the Hong Kong market with $11.2 billion raised post-greenshoe, was priced at 2.l8 times its estimated 2006 book value, which marked a 10.3% discount to China Construction BankÆs 2.43 times P/B valuation at that time. Since listing, BOCÆs share price has risen 14.2%, boosting its valuation to about 2.3 times book.

To ensure sufficient demand for its mega-offering and instill confidence among other potential investors, ICBC has already signed up 15 corporate investors who together have agreed to take up $3.5 billion worth of H-shares in the global offering. These investors include all the usual Hong Kong tycoons, but also more unusual names like Singapore investment company GIC Direct Investments which will buy HK$2.8 billion worth of shares, the Kuwait Investment Authority which is buying HK$5.6 billion worth of stock and the Qatar Investment Authority which has agreed to invest HK$1.6 billion. The single largest corporate investor is China Life Insurance which is taking up HK$4.4 billion worth of stock, while its Hong Kong-listed unit China Life Insurance is buying HK$2 billion worth of stock.

ôThere is some nervousness about the size of this deal and the potential liquidity drain, but with this many cornerstone investors already in place and committing close to $4 billion it feels like the market will be able to absorb it,ö reflects one observer.

Earlier this year, ICBC sold a 10% stake in the bank to a consortium led by Goldman SachsÆ GS Capital Partners V fund and which also included Allianz AG and American Express. These pre-IPO investors, which paid a combined $3.78 billion for their shares, currently hold about 8.45% of the bank and will see their stake fall further to around 7.4% as a result of the IPO.

The shares are scheduled to start trading on October 27.
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