Rewriting record books

IFR Asia - Asian Issuers 2010
5 min read

The last of China’s big four bank IPOs came to market amid treacherous conditions, but that did not stop Agricultural Bank of China from closing the record deal.

A gricultural Bank of China will look back fondly on August 13. On that day, China’s third-largest lender fully exercised the greenshoe for its Shanghai IPO, lifting the size of its dual Hong Kong and Shanghai IPO to US$22.1bn and cementing its place in history as the world’s largest ever IPO.

Having been forced to watch and wait as three of the “big four” state-owned lenders went public, ABC finally set the ball rolling for its own listing in April, when it invited the top investment banks in town to pitch for the mandate.

Not surprisingly, bankers were desperate for a piece of the action, but, at the same time, there were worries about ABC’s “impossible” mid-July listing deadline, giving them less than four months to complete the transaction. The rushed timetable seemed impossible for any large listing, never mind the largest IPO on record. However, ABC succeeded where others might have failed and did so spectacularly against an unfavourable market backdrop.

ABC’s IPO certainly came at a difficult time. Plunging European sovereign debt markets had severely dented investor sentiment and forced the cancellation of a host of IPOs across the world. Investors shunned new offerings, only accepting deals that were exceptionally cheap.

In the eyes of many, ABC’s valuation was definitely not cheap. The HK$81.3bn (US$10.45bn) H-share tranche was marketed at HK$2.88–$3.48 per share, while the Rmb59.6bn (US$8.79bn) A-share portion was at Rmb2.52–Rmb2.68 per share. The H-share range represented 1.55–1.79 times 2010 book value pre-shoe, or a post-shoe P/B of 1.53–1.76 times. The A-share range translated into a 2010 P/B of up to 1.65 times. Some investors simply found ABC’s deal too aggressively priced, while others argued it was reasonable due to the lender’s potential. Many were prepared to buy into the offer only if it was priced at up to 1.5 times 2010 P/B.

In order to increase its bargaining power with global funds, ABC drew a large number of cornerstone investors into the float. Eleven investors took up shares worth a total of US$5.45bn, or 52% of the H-share offering. They were Qatar Investment Authority, Kuwait Investment Authority, Standard Chartered Bank, Rabobank, Seven Group, Temasek Holdings, China Resources, China Travel Service, Archer-Daniels Midland, Cheung Kong Holdings and United Overseas Bank. ABC applied the same strategy to its A-share offering, with 27 cornerstone investors taking up 40% of the float.

In contrast, ICBC, which listed in Hong Kong and Shanghai in 2006 in a deal that raised US$21.9bn, brought in 13 cornerstone investors for its IPO. Together, they took up a mere 25.4% of the H-share float.

The cornerstone strategy worked. Momentum began to build for the H-share offering, even if A-share investors remained largely apathetic.

In the end, the A-share offering was priced at the top of the marketed range at Rmb2.68 per share, raising Rmb59.6bn, while the H-share offering was priced at HK$3.20 per share, around the middle of the HK$2.88–$3.48 indicative price range, raising HK$81.3bn. The pricings valued the lender’s A-shares at a 2010 P/B of 1.65 times and the H-shares at 1.68 times book.

Relative to the response to previous jumbo Chinese bank IPOs, ABC did not get a huge reception. The institutional portion of the Hong Kong IPO attracted orders worth about US$50bn, excluding cornerstone investors. The H-share book, not including the cornerstone tranche, was just over 10 times covered with the participation of more than 500 investors. The retail tranche was only five times covered.

ABC’s A-share tranche also drew relatively tepid retail interest. The retail offer was 15 times subscribed and the institutional book 14 times. Although the size of the deal meant these were huge numbers, the sheer scale of the Chinese market left the subscription rate looking slightly underwhelming. The two A-share tranches soaked up a combined Rmb480.3bn in subscriptions, far less than the figure of at least Rmb1trn that the market had originally anticipated.

The trading debut was also muted. ABC shares started trading on the Shanghai bourse on July 15 and the Hong Kong bourse on July 16, and stayed above water on both debuts. However, the performances were relatively disappointing compared with the first-day gains that ICBC and Bank of China had posted.

On debut, the Shanghai-listed A-shares closed at Rmb2.70, 0.75% above the issue price of Rmb2.68. Relatively speaking, the H-shares fared better, ending the day at HK$3.27, 2.19% above the issue price of HK$3.20.

Since listing, however, investors have shown more support for ABC’s H-shares. The lender’s H-share price has never fallen below the issue price, which allowed the exercise of the greenshoe on July 29. ABC’s A-shares, meanwhile, fell below the offer price on September 16 and were 3.4% lower at Rmb2.59 on September 21. The H-shares were at HK$3.84, 20% above the IPO price.

ABC International, CICC, Deutsche, Goldman Sachs, JP Morgan, Macquarie and Morgan Stanley led ABC’s Hong Kong listing. CICC, Citic Securities, Galaxy Securities and Guotai Junan Securities arranged the Shanghai sale.

Fiona Lau