In each of China's major IPOs, it has become the norm to bring in a major strategic investor. The purpose of this is usually to get the average Hong Kong taxi driver excited about buying the stock. Since most taxi driver's idol is Li Ka-shing, he has frequently been the favoured choice.
However, Li has no experience of banking, and Bank of China's investment story (as a bank) has taken a bit of a pounding over the past year. Step forward, Standard Chartered.
The British bank, which is also one of the biggest in Hong Kong, has agreed to buy around 2.5% of Bank of China HK's IPO. The exact percentage will depend on where the deal prices - since Standard Chartered has committed $50 million worth of stock - but given that 25% of the bank is being floated, that will give it a stake of around 0.65% of the entire bank.
This will be subject to the usual one year lock-up, but why is Standard Chartered interested in owning such a meaninglessly small stake?
The two parties have been in discussions over the stake for a few months, and it would appear that Standard Chartered was keen to step forward and make the investment. StanChart says the two banks have made a commitment to explore areas of cooperation. However, it is far more likely that StanChart sees this as a far-reaching piece of guanxi that will reap rewards for its China business over time.
It is a major favour. The Chinese government sees the Bank of China HK offering as the first step in the privatization of the banking sector and has attached paramount importance to the deal's success. This is where StanChart can help. Its move demonstrates confidence in the bank, and will send out a powerful signal that will do much to scotch all the negative PR that has been floating around about the Bank of China in the past few months.
And if the truth be told, it may turn out to be a very savvy investment for StanChart too. Put simply, this bank is being sold 'dirt cheap'. At the bottom end of the price range, it will be sold on a price to book of only 1.35 times. Consider that Hang Seng, trades at 3.5 times book (however, this is not a perfect comparable since Hang Seng's very low cost income ratio is a result of its relationship with HSBC).
Bank of China HK will be sold cheaply because of its perception problem, and the general impression that there is a lot of China loans hidden in there. The story that needs to be told is that this is a bank with nearly 88% of its assets in Hong Kong. Like Hang Seng, it is a Hong Kong investment story, with some China upside. Even in a flat revenue environment, growth will come over time from improving the cost structure and quietly shutting branches.
The deal will have a 10% retail tranche and will roadshow with a price range of HK$6.93 to HK$9.5. At the upper end of the range that equates to a price to book of 1.85 times and a PE ratio of 16 times forecast 2002 earnings. Retail investors will also get a 5% discount to the institutional price.
Bank of China has been seeking an appropriate strategic partner for several months, and at one stage Barclays was even rumoured as a candidate. With the selection of StanChart is this another case of the Goldman nexus at work? Goldman Sachs, as is well known, is the closest firm to KS Li and was instrumental in bringing him in as a strategic investor in earlier China deals.
This time round Goldman Sachs is one of the joint global coordinators on the Bank of China HK IPO (with UBS Warburg) and is also mandated to list Standard Chartered in Hong Kong. On the other hand, UBSW is also close to StanChart, having advised it on several acquisitions, most recently on its unsuccessful attempt to buy BCA in Indonesia.
