The season for the IPO redo

, , , , China, Cornerstones, Hong Kong... +2 more

China Everbright Bank, the country’s 13th largest bank as ranked by assets, is set to raise up to US$2.5 billion in what could be the largest initial public offering in Asia, so far in 2012.

The issuer, founded in Beijing in 1992, attempted a US$6 billion flotation last summer, having previously listed in Shanghai in 2010. Last year’s deal was too ambitious and its collapse was blamed – as usual in such cases – on market conditions.

The drastic reduction in deal size should make this quasi-IPO easier for investors to swallow. Meanwhile, the bank’s share price dropped 19%. Given that the price of the Hong Kong offer will be referenced to the Shanghai trading level, the decline will make the offer cheaper to local investors, and therefore more palatable. China Everbright’s latest offer is likely to price at a discount of up to 10% to the Shanghai shares, as has been the case for recent Chinese IPOs with a prior listing on the mainland.

That’s the good news. The bad news is that the external trading environment is choppy. The VIX index – which measures the volatility of share price moves, as is popularly known as a “fear index” – is at its highest level for four months thanks to the latest euro-zone conflagration.

China Everbright no doubt will try to shore up its offer by pre-selling a large part of the deal to a rich base of cornerstone investors, as has been common practice among new issuers of late. But, given the fraught environment, the firm may find it tough to persuade key accounts to commit to staying invested in its stock for six months, a requirement for cornerstone arrangements in Hong Kong. The alternative is to sell shares to anchor investors (at an early stage, but without a formal contractual agreement) or hither and thither during a wide-open marketing period, possibly amid a selloff and high volatility.

The bank’s first quarter results, which rose 41 per cent, as well as an increased capital adequacy ratio and a stable non-performing loan ratio, may help reassure market participants that ChinaEverbright is on the right track, and that some value may be unearthed amid a sector that has lost some of its lustre.

Valuation-wise, the Shanghai-listed stock trades on a price-to-book ratio of 1.25 times, much less than that of China Merchants (1.54 times). But it remains more expensive than those of peers China Citic Bank or China Minsheng Bank, which, in Shanghai, trade at 1.16 times and 1.25 times respectively. Broker Haitong Securities, which recently floated in Hong Kong, and whose share price there hovers around the IPO level, trades at around 1.80 times book value.

Another factor remains the heavy IPO pipeline across the region as issuers attempt to tap the market before their year-end accounts go stale for filing and comfort purposes. In Hong Kong, these include, in the financial institutions sector, insurer PICC as well as China Guangfa Bank (formerly known as Guangdong Development Bank). Investment banks have also been asked to revert with pitches to list Bank of Shanghai by May 31. The IPO of Chinalco’s Peruvian mining assets is also said to be imminent, while the flotation of Graff Diamonds (on which Money Post reported last week) is on track for a June 7 listing. Elsewhere in Asia, the IPO of Formula One is set to price later in June in Singapore, while investors will get an opportunity to buy into Malaysia’s US$3 billion palm oil offering by Felda Global Ventures, said to be marketed on an attractive, low, double digit price-to-earnings ratio.

Having just filed its preliminary listing application with Hong Kong exchange, China Everbright Bank should now be – in theory – about 10 to 12 weeks away from listing. Second time lucky?

Philippe Espinasse, a former investment banker, is the author of “IPO: A Global Guide” (HKU Press).

[This article was originally published in The South China Morning Post on 21 May 2012 and is reproduced with permission.]

(c) 2012 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.