Pricing to Play a Key Role in Hong Kong IPOs as Mainland Companies Tap Market

Strategic Insights -

Market conditions, particularly China's slowing economic growth and interest rate hikes, are putting a premium on attractive valuations for listing candidates, say fund managers. China Shenhua Energy, Bank of Communications, and Cosco Holdings are expected to face a challenging equity market and need to offer more competitive pricing to investors. Despite the difficulties, the IPOs are attracting attention, with Bank of Communications being particularly noteworthy as the first mainland state-owned bank to seek an overseas listing.

Key Takeaways:

  • The IPOs of China Shenhua Energy, Bank of Communications, and Cosco Holdings are expected to face a challenging equity market due to China's slowing economic growth and interest rate hikes.
  • Fund managers predict that listing candidates will need to offer more attractive valuations to compensate investors for the economic uncertainty.
  • Bank of Communications, the first mainland state-owned bank to seek an overseas listing, is expected to stress its role as a first mover in bank reform in China after last year's state re-capitalisation and non-performing loan sales.
  • The bank's improved balance sheet and strong earnings growth in the next two years will be key marketing points, with non-performing loans expected to fall to 2.87% next year.
  • HSBC's 19.9% stake in Bank of Communications, acquired for US$1.75 billion in July last year, will provide a comforting presence to investors and act as a floor for the offer valuation.
  • Goldman Sachs estimates that Bank of Communications' net profit will soar 393% to 7.9 billion yuan this year and rise a further 18.6% to 9.38 billion yuan next year.
  • The IPOs will be priced competitively, with fund managers indicating that the level of investor interest will depend on the pricing.

Statistics:

  • 10 IPOs raised in Hong Kong this year, against 23 in the first half of last year.
  • Bank of Communications' non-performing loans fell to 3% of loans last year from 11.88% in 2003.
  • The bank's loan growth is expected to reach 19.4% this year and improve further to 2.87% next year.
  • Bank of Communications' net profit is expected to soar 393% to 7.9 billion yuan this year and rise a further 18.6% to 9.38 billion yuan next year.
  • HSBC paid 1.86 yuan per share for its 19.9% stake in Bank of Communications.
  • Goldman Sachs' estimated fair value of Bank of Communications ranges from 80.3 billion yuan to 98.1 billion yuan.

Sources:

  • Goldman Sachs report
  • A fund manager's statement to the press
  • A Goldman Sachs report citing a firm valuation floor at 72.8 billion yuan
  • Hong Kong's equity market data
  • China's economic growth data
  • Bank of Communications' financial data
  • HSBC's investment in Bank of Communications