Postal Savings Bank of China’s long-awaited Hong Kong initial public offering is the year's stand-out global listing so far, such is its scale, but just as salient is the degree to which it leans on pre-deal commitments from other Chinese state-owned enterprises.
On Tuesday, China’s largest lender by number of branches began offering shares to investors, looking to raise as much as HK$62.7 billion ($8.1 billion), which would make it Hong Kong's biggest IPO in six years. On offer are 12.1 billion new shares priced at between HK$4.68 to HK$5.18 each.
Jumbo equity offerings are usually seen as a key gauge of market sentiment because it shows how eager investors are to put large sums of money to work.
In the case of PSBC, however, outward appearances can be deceiving because the coming huge deal is relying heavily on subscriptions from so-called cornerstone investors.
The use of cornerstone investors, in common with previous billion-dollar Chinese listings, helps to ensure an IPO's smooth passage. But it can also draw attention to the tepid state of underlying investor demand and hurt market liquidity once shares start to trade due to extended lock-up periods.
In the case of PSBC, about three-quarters of the IPO is being snapped up by just six cornerstone groups, led by China Shipbuilding Industry Corporation and Shanghai International Port Group, which have committed $2.2 billion and $2.1 billion, respectively. Hainan-based HNA Group will subscribe to $1 billion worth of shares, while State Grid, China Chengtong Holdings and China Great Wall Asset Management are each investing $300 million, $150 million, and $100 million, respectively.
Altogether, these cornerstone investors could account for as much as 80.2% of the entire transaction if the deal is priced at the lowest end of its indicative price range. At that level it would, proportionally, be the biggest cornerstone investment ever seen in a Hong Kong IPO. But even at the priciest range end, they would still account for a staggering 72.4%.
And the fact all six cornerstone investors are Chinese state-controlled entities only serves to further undermine the idea that the PSBC IPO will be a reliable litmus test of public investor sentiment.
Defensive benchmark constituent
PSBC is almost certain to become a constituent of Hong Kong's leading market indices due to its potential market capitalisation of $54 billion, which will make it the city’s fifth-largest listed company behind Tencent, China Mobile, AIA, and CNOOC, bankers said.
As such, PSBC is expected to attract interest from passive index-tracking funds and exchange-traded funds, meaning the IPO will be able to cross the finishing line even with minimal participation from investors seeking value.
All of which serves to make the bank’s valuation – at 0.93 times to 1.02 times estimated 2016 book value – seem irrelevant, due to the lack of price sensitivity involved. That applies also to the cornerstone investment, given the perceived state pressure to ensure the landmark deal does not fall through.
For prospective investors, the implications can be positive. With such heavy backing from other SOEs, the likelihood that PSBC's share price will fall in the immediate aftermarket is low, reinforcing one of its selling points as a safe and defensive stock.
PSBC is broadly viewed as a less risky alternative to other Chinese state-owned lenders because it has less exposure to some of the country’s more debt-laden companies. The default rate for PSBC’s loans was 0.81% as of the end of March, which is more than 50% lower than the industry average of 1.75%.
The institutional bookbuild for PSBC’s IPO will run through September 20 and the lender is expected to begin trading on September 28.
Joint bookrunners of the IPO are DBS, China Merchants Securities, HSBC, Citi, BOCOM International, CCB International, ICBC International, BOC International, Haitong, ABC International, CMB International, First Capital, Sun Hung Kai, Essence Securities, Galaxy Securities, China Securities, Nomura, Deutsche Bank, Citic CLSA, and Huarong International.
The PSBC IPO looks set to be one of the defining deals of China’s second great phase of banking privatisation. So it is worth comparing with the first wave of listings seen several years earlier to see how much things have changed over time.
PSBC’s IPO will be the largest in Hong Kong since Agricultural Bank of China’s (ABC) $22.1 billion listing in July 2010. ABC’s IPO was a major milestone of Chinese banking reform as it was the last of the so-called Big 4 Chinese banks to list on the stock market.
One clear difference between the two IPOs is the level of foreign participation.
When ABC conducted its IPO six years ago, the participating cornerstone investors comprised a variety of non-Chinese institutions including the investment authorities of Qatar and Kuwait, Singapore’s Temasek Holdings and United Overseas Bank, Australia’s Seven Group, Netherlands-based Rabobank, London-headquartered Standard Chartered Bank, as well as Hong Kong conglomerate Cheung Kong Holdings and US corn processor Archer Daniels Midland.
China Resources Holdings and China Travel Services were the only two Chinese cornerstone investors, investing a total of $350 million – or a mere 1.6% of ABC’s IPO.
Such high levels of foreign interest in Chinese banking coincided with equally high expectations for Chinese economic growth as the country gradually opened its doors to foreign investment. The listing of the Big 4 banks was a key plank of China’s major banking liberalisation programme.
In contrast, PSBC is listing at a time when China is struggling to keep up the pace of growth it achieved in previous years, slowing to less than 7% from a double-digit pace earlier in the decade.
For many foreign investors, the attractiveness of investing in China has diminished as economic growth has slowed and bad loans have mounted, hidden under shadow assets such as wealth management products, trust schemes, and structured products.
That perhaps explains another key difference – market valuations. Right now, it is inconceivable that any Chinese bank could come to market and be listed at 2.6 times its book value – as happened to Industrial & Commercial Bank of China in 2006 during its $19 billion IPO.