ICBC's indicative price range offers discount versus peers

Price range indicates pre-greenshoe deal size of $15.9 billion to $19.1 billion for combined H and A share offering. The offering has the potential to become the world's largest IPO.
Industrial and Commercial Bank of China has set a price range for its mega-size initial public offering. The range will value the stock at a discount of 10-22% to China Construction Bank - which is widely viewed as the bank's closest comparable, sources familiar with the offering said yesterday. Based on current market prices it will also offer a discount to Bank of China, albeit a smaller one.

ChinaÆs largest bank, which will kick off the official roadshow for its dual listing in Hong Kong and Shanghai today, will sell the Hong Kong portion of its offering at between HK$2.56 and HK$3.07 per share for a total deal size of $11.7 billion to $14 billion, the sources say.

Including the domestic A share portion of the deal, which will carry the same price range as the Hong Kong H share sale (adjusted for the exchange rate) the total deal size will be between $15.98 billion and $19.14 billion. This means it could trump NTT DoCoMosÆ $18.4 billion IPO in 1998 as the largest initial share offering in the world. The chances of surpassing the Japanese mobile operator will increase if the 15% greenshoe on both the H share and A share offerings are exercised, in which case the maximum deal size could swell to about $21.9 billion.

The price range values ICBC at 1.96 to 2.23 times its pre-greenshoe 2006 book value, based on consensus syndicate estimates. Looking ahead to 2007, the valuation will drop to about 1.74 to 2 times book.

That valuation appears to be in line with what fund managers have previously said they would be willing to pay for the bank, which has an unmatched customer reach within China and holds a leading market position within many of the businesses areas it focuses on. According to one source yesterday, the feedback from international investors during pre-marketing have been very similar to that received from domestic A share investors in terms of valuations.

Because of the size of the offering, however, and the need to make sure that this first-ever dual H and A share listing does well, it seems unlikely that the deal will price towards the very top of the indicated range. As a guidance, BOC was priced at 2.l8 times its estimated 2006 book value when it came to market in May, which at the time represented a 10.3% discount to CCB. BOC raised $11.2 billion post-greenshoe in what still represents the largest IPO in the Hong Kong market.

The final price of the ICBC offer is set to be determined on October 20 û one day after the books close. The trading debut is scheduled for October 27.

On a 2006 basis, the indicated valuation compares with CCBÆs current valuation at 2.5 times its estimated 2006 book value and Bank of ChinaÆs 2.32 times. On a 2007 basis, CCB trades at 2.25 times while BOC falls to 2.15 times. The four Hong Kong-listed Mainland banks together, trade at an average price to book multiple of 2.73 times for 2006 and 2.47 times for 2007 because of the high valuations of smaller-sized Bank of Communication, in which HSBC owns just under 20%, and China Merchants Bank. The latter is widely regarded as one of ChinaÆs best managed and most profitable commercial banks - for example, it won FinanceAsia's Best Bank in China award this July.

China Merchants Bank listed in Hong Kong as recently as September 22 at a 2006 price to book multiple of 2.39 times, but has seen its share price rally 36% since then and now trades at 3.2 times book.

While BOC is the closest in size to ICBC, investors tend to use CCB as the most direct comparable because the 40% stake that BOC owns in BOC Hong Kong (Holdings) does distort BOCÆs numbers somewhat. CCB is seen as a purer Mainland bank, one banker says.

ICBC is offering 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 of existing shares. It will also offer 3.97% of its enlarged share capital to China-based investors in the form of 13 billion A shares.

Both the H share offer and the A share offer have a greenshoe that can increase the number of shares on offer by 15% and boost the public float to about 17% from 14.8%

China International Capital Corp, ICEA and Merrill Lynch are joint global coordinators for the international portion of the deal as well as joint bookrunners together with Credit Suisse and Deutsche Bank. The A share sale is being arranged by CICC, CITIC Securities, Shenyin & Wanguo Securities and Guotai Junan Securities.

At the end of 2005, ICBC had total assets of $815 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 totalled $407.6 billion and $710.9 billion respectively, representing a 30.4% and 32.6% share of loans and deposits at the Big Four.

As of June 30, its total assets had increased to $890 billion and the return on assets stood at 0.73%. Its capital adequacy ratio was 10.74% - well above the required 8% - and its non-performing loan ratio was 4.1%.

Aside from sheer size, analysts believe that the bankÆs focus on newer and more profitable segments of the market, its lower funding and operating costs, its decision to focus on wallet share rather than on loan growth in itself, and a superior IT system will help attract investors. The bankÆs non-interest income has increased to 10.8% of total operating income in the first half of 2006 from 7.6% in 2003.

To further boost the confidence among potential investors, ICBC has already signed up 15 corporate investors who together have agreed to take up $3.5 billion worth of H share in the global offering. Those buyers include the usual Hong Kong tycoons as well as Singapore investment company GIC Direct Investments and a couple of government investment agencies in the Middle East.

Earlier this year the bank also sold a 10% stake in the bank to a consortium comprised of Goldman SachsÆ GS Capital Partners V fund, Allianz and American Express. These pre-IPO investors, which paid a combined $3.78 billion for their shares, will hold about 7.4% of the company at the time of listing.

ICBC is forecasting a 2006 profit of at least Rmb47.2 billion, or 14 fen per share, under Mainland accounting standards, which represents an increase of about 26% from last year. It posted a net profit of Rmb25.4 billion for the first half this year.

According to an information document published ahead of pre-marketing, the bank ôcontemplatesö paying 45% to 60% of its net profit as divided in each of 2007 and 2008, which compares with BOCÆs plans to pay between 35% and 45% of its earnings in the same period.

At the end of June, the bank had over 150 million personal customers û equal to the entire population of Hong Kong, Taiwan, Singapore, Malaysia and the Philippines combined û and 2.5 million corporate customers. The number of domestic branches totalled more than 18,000.
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