ICBC surprises no one by pricing record IPO at the top

At $19.1 billion, the IPO from China's largest lender marks the largest initial share sale in the world. The institutional order book was covered in half an hour.
Industrial and Commercial Bank of China (ICBC) has fixed the price for its initial public offering at the top end of the HK$2.56 to HK$3.07 range, securing the dealÆs position as the worldÆs largest IPO ever.

Together, the bankÆs A-share and H-share offers raised $19.1 billion û well above NTT DoCoMoÆs $18.4 billion IPO in 1998 û and thatÆs even before exercising the greenshoe. Including those additional shares, which account for 15% of the initial offer, the deal size could increase to $21.9 billion.

The H-share portion, which will list in Hong Kong, accounts for $13.9 billion of the base deal size, while the remaining $5.1 billion is made up of A-shares that will be listed in Shanghai. The price of the A-shares was fixed at Rmb3.11, which is equal to the H-share price adjusted for the exchange rate. Both the H-shares and A-shares will start trading on October 27.

The top-end pricing was almost a given, based on the massive demand from both institutional and retail investors. Initial hopes that ChinaÆs largest lender would leave a few cents extra on the table for investors and thus allow for a slightly wider discount versus Bank of China in particular, were essentially dashed once the entire deal was fully covered within 30 minutes of the order books being opened.

At the final price of HK$3.07, ICBC is valued at a 4% discount to Bank of ChinaÆs Hong Kong-listed shares and at a 15% discount to China Construction Bank (CCB) when looking at the current estimated 2006 book values, according to people familiar with the offering.

Investors didnÆt seem to mind the narrow discount to BOC given that most observers argue ICBCÆs larger scale and leading market position in many of its core business segments does warrant a premium to its state-owned peers in Hong Kong. Taken together with the overwhelming demand û which will obviously result in orders being scaled back significantly û ICBCÆs share price is expected to trade up immediately the stock hits the market.

The demand in the aftermarket is likely to be underpinned by a belief that the stock will go into several key indices, including the MSCI index series. The index provider hasnÆt yet made any announcement on the matter, but it is widely expected that ICBC will be fast-tracked into its indices given its size. The early issuance of a large number of Hong Kong-listed warrants based on the stock is also seen to support the buying, as warrant issuers will need to hedge their exposure. Applications to print warrants can be submitted from today (October 23).

One fund manager says he expects the stock to ôgain about 15% in the first few daysö, which will put it on par with CCB. Others have suggested the price will jump as much as 20% before triggering profit taking from retail punters in particular.

These are sweet numbers for any investor and especially for Goldman Sachs and its partners Allianz and American Express, which in April paid a combined $3.78 billion for what will be a 7.4% stake in ICBC at the time of listing. Based on a market cap of $129 billion, that stake is worth $9.5 billion. Goldman Sachs alone will have made a paper profit of $3.9 billion on its original investment of $2.58 billion (made through its GS Capital Partners V fund) in just under six months.

However, all three investors have committed not to sell any of their shares until April 28, 2009, and given GoldmanÆs strategic partnership with ICBC, the US investment bank is likely to retain the majority of its holdings for a longer period still.

ICBC will start trading at 2.23 times its post-money 2006 book value, based on the consensus syndicate forecasts, and at 2.0 times its 2007 book value. On a 2006 basis, BOC is currently trading at about 2.4 times, while CCB is quoted at about 2.7 times. Share prices of both banks have edged higher during ICBCÆs roadshow which increased the relative attractiveness of the listing candidate.

International investors subscribed for just under $300 billion worth of shares, while Hong Kong retail investors put in orders worth a staggering HK$423 billion ($55 billion). Contrary to institutional investors, who just need to tell the bookrunners how many shares they want, retail investors have to submit a cheque for the full order amount at the time of subscription, meaning this chunk of cash is now locked up in the system and earning a handsome interest for the company.

The retail subscription marks the largest demand for a Hong Kong public offering ever, and corresponds to 78 times the shares initially available to retail investors. This means the retail tranche will not be increased to the maximum 20%, which would have taken a subscription rate of 100 times, but will expand to 10% from the initial 5%.

Across the border, the A-share tranche attracted another $85 billion worth of demand, according to sources, which means the total demand for the lender that only two years ago had a non-performing loan ratio of more than 20%, was in excess of $430 billion.

In addition, ICBC sold $3.5 billion worth of its IPO H-shares to 15 corporate investors, including the usual Hong Kong tycoons, Singapore investment company GIC Direct Investments and a couple of government investment agencies from the Middle East.

Over the past few years, the bank has started to reap the benefits from a transformation and restructuring that began as far back as 1999 and includes the injection of $15 billion in fresh capital from the government and the sale of Rmb705 million of NPLs as recently as last year. This enabled the management to throw around some pretty impressive numbers during the roadshow.

Among those were an NPL ratio of only 1.6% on loans made after 1999 (these now make up 95% of total loans), a compound annual growth rate of 29% in net profit between 2003 and 2005, a return-on-equity of 15.6% as of the first half of 2006 and a cost-to-income ratio of 35%

However, like the other Mainland banks, ICBC, which has total assets of about $890 billion, has yet to prove that its new risk management strategies work in a market with slowing economic growth and that it can maintain its loan growth while continuing to reduce its overall NPLs from 4.1% at present.

China International Capital, ICEA, Merrill Lynch, Credit Suisse and Deutsche Bank were joint bookrunners for the H-share offering. The A-share sale was arranged by CICC, CITIC Securities, Shenyin & Wanguo Securities and Guotai Junan Securities.
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