Sigh of relief as Agricultural Bank gains 2.2% on day one

The fact that the stock didn't fall below issue price and there was no need to stabilise should be regarded as a positive sign.

The local press may have described the debut as lacklustre and disappointing, but for people involved in Agricultural Bank of China's (ABC) $19.2 billion initial public offering, the first trading day in Hong Kong on Friday mainly gave rise to a deep sigh of relief. The stock opened up, never fell below the IPO price and closed with a 2.2% gain. Even more importantly, bankers didn't have to buy back any of the overallotment shares to help stabilise the stock. In other words, there was demand for the stock at these levels.

This suggests that if global equity markets hold up over the next few weeks, the bank has a decent chance of being able to exercise the 15% overallotment option on the H-share tranche and sell the additional shares that could make it the largest IPO in the world. For that to happen, it needs to exercise the overallotment option on the A-share tranche as well, and while trading has looked less stellar in that market so far -- the stock gained Rmb0.02 on the first day and fell by Rmb0.01 on the second day -- it seems likely that there will be enough willing buyers for the bank to reach its goal.

If both overallotment options are exercised in full, the total deal size will increase to about $22.1 billion, just ahead of Industrial and Commercial Bank of China's $21.9 billion IPO in 2006. This would be a massive achievement given that ABC has historically been viewed as the weakest of China's big four state-controlled banks. And especially considering that the global market environment remains highly volatile with concerns about economic growth rates persisting. Indeed, had ABC fallen on its first day, there would have been a real risk of it pulling the entire market down with it, as investors are quick to react to bad news these days.

Trading in Hong Kong wasn't that active with 3.19 billion shares changing hands on the first day, representing about 12.6% of the shares sold in the IPO. However, excluding the $5.45 billion worth of shares that were bought by cornerstone investors and which cannot be sold in the first 12 months, the turnover accounted for just over a quarter of the available shares. Still, 60% of the day's entire trading volume happened in the first 45 minutes after opening.

Goldman Sachs, which is the stabilising agent for the H-share tranche, handled about one-third of the trading volume, according to a source, who said close to 90% of the trading flow that went through the bank was buying, while only 10% was selling.

Also active buyers on Friday, according to the screens, were Deutsche Bank and Morgan Stanley, while Nomura was busy on the sell-side with numerous orders, although mostly in small volumes. It was unclear on behalf of whom Nomura was selling, and whether the selling was related to the placement of $400 million worth of IPO shares with Japanese retail investors through a so called Public Offer Without Listing, or POWL. Nomura handled the POWL together with Daiwa Securities.

As usual there was also some early selling by Hong Kong retail investors, although with the retail tranche being quite small -- only $1.04 billion -- that didn't really have much impact. The buyers were said to have been primarily long-only funds that were topping up their allocations, as well as some long funds that didn't buy through the IPO and some hedge funds. The institutional tranche, which excluding the cornerstone tranche accounted for about $4.4 billion of the $10.4 billion H-share offering, was 10 times covered according to sources, which explains where some of that additional demand may have come from.

The stock opened at HK$3.25, or 5 HK cents above the IPO price of HK$3.20, and never fell below there. The intraday high of HK$3.31 was hit within the first 45 minutes and after that the stock traded mostly in a narrow range between HK$3.26 and HK$3.29. It closed at HK$3.27. Even with those modest gains, ABC still outperformed its peers on the day with Industrial and Commercial Bank of China (ICBC) down 0.9%, China Construction Bank (CCB) off 0.6% and Bank of China (BOC) up 1.7%. The H-share index fell 0.07%.

The continuing demand for ABC should also be a positive sign for the other Chinese banks that are still looking to raise tens of billions of dollars to replenish their balance sheets following last year's lending spree and in response to tighter capital requirements. However, the fact that most of this fund raising will now be through rights issues, rather than the sale of new shares through placements, have eased the earlier concerns about the upcoming supply. Indeed there are signs that investors are starting to worry that there will not be enough new shares to meet the demand.

The results of Bank of Communications' $4.8 billion rights issue of A- and H-shares that were formally published on Friday showed that the H-share portion was 99.3% subscribed with excess subscriptions for three times as many shares as was on offer. Bank of America Merrill Lynch, BOC International, BNP Paribas, BoCom International, Citic Securities, Goldman Sachs and HSBC were joint underwriters.

Next in line is Bank of China, which said earlier this month that it plans to raise up to Rmb60 billion ($8.8 billion) from a rights issue of A- and H-shares following an extraordinary general meeting on August 20 - assuming it get shareholders' approval to proceed. It is planning to offer 1.1 rights shares for every 10 existing shares and based on the number of outstanding shares, the A-share portion will account for about 70% of the offering, while the H-share portion will make up the remaining 30%. Bank of America Merrill Lynch, BOC International, CCB International, Credit Suisse and ICBC International will be arranging the deal.

ABC sold 25.412 billion H-shares, accounting for 8% of the company pre-shoe and 53.3% of the combined A- and H-share offering. Based on the final price, the size of the H-share tranche was HK$81.3 billion ($10.4 billion), which could increase to $12 billion if the overallotment option is used in full.

It also sold 22.235 billion A-shares, representing 7% of the enlarged share capital and 46.7% of the total deal. The A-share portion raised Rmb59.6 billion ($8.8 billion), which could increase to $10.1 billion if the overallotment option is exercised. The A-share price was fixed at Rmb2.68 which, based on the exchange rate used in the listing prospectus, translated into roughly HK$3.06 per share.

China International Capital Corp (CICC), Goldman Sachs, Morgan Stanley and ABC's own investment banking arm, ABC International, acted as global coordinators for the H-share offer, with Deutsche Bank, J.P. Morgan and Macquarie joining them as bookrunners.

The A-share tranche was arranged by CICC, Citic Securities, China Galaxy Securities and Guotai Junan Securities.

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