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Chinese Bank Promotes $4 Billion IPO


China Minsheng Banking Corp will kick-off the roadshow today for what looks set to become the largest Hong Kong initial public offering so far this year. The privately controlled Chinese bank, which is already listed in Shanghai, is seeking to raise between HK$28.2 billion and HK$31.5 billion ($3.6 billion to $4.07 billion).

While the size looks somewhat ambitious, given the recent increase of volatility in global equity markets and growing concerns that rising interest rates may dampen the global economic recovery, sources say investors are quite keen on the Chinese banks as proxies for the Chinese growth story. Minsheng is also being offered at a quite sizeable discount to most of the other Chinese banks listed in Hong Kong, which will boost its attractiveness.

Minsheng had Rmb1.4 trillion ($167 billion) of assets as of the end of September and about 400 outlets nationwide.

Support from cornerstone investors, who have committed to buy $340 million worth of shares, or between 8.4% and 9.3% of the global offering depending on the final deal size, may add to the investment sentiment for this stock, although none of Hong Kong's top tycoons are involved this time.

According to sources last night, the shares will be offered in a range between HK$8.50 and HK$9.50, which values the lender at 1.67 to 1.8 times its estimated 2010 book value, including the 15% greenshoe. This compares with an average price-to-book multiple of 2.3 for the other Hong Kong-listed Chinese banks, and at the bottom of the range is largely in line with China Citic Bank, which is the cheapest among the Chinese banks at about 1.65 times book. However, analysts argue that Minsheng should trade at a premium to China Citic Bank due to its better fundamentals.

Even during last week's pre-marketing it wasn't entirely clear how Minsheng would price in relation to its own A-shares. Other Chinese companies that have completed dual listings in recent years have been required to price the Hong Kong-listed H-shares at a premium to the Shanghai-listed A-shares, although such a scenario was complicated by the fact that Minsheng's A-shares are already listed and are a moving target to price against.

As it turns out, no such pricing restriction is being imposed on Minsheng. The bank is free to price its shares wherever it wants. That said, bankers working on the deal are mindful that the Hong Kong shares shouldn't price too far above the A-shares, or the aftermarket performance may be affected. Consequently, the H-share price range has been set to leave some room for the A-shares to fall between now and Minsheng's pricing on November 18 and still enable the Hong Kong IPO to price in line, while at the same time allowing for the fact that the A-shares may trade higher during this period. The A-share price has gained 8% over the past six trading sessions, suggesting that a correction could be on the cards.

The HK$8.50 to HK$9.50 price range, translates into Rmb7.50 to Rmb8.38, which at the bottom end equals a discount of 7.7% versus Minsheng's closing price of Rmb8.13 in Shanghai on Friday. The upper end of the range pitches the Chinese lender at a 3.1% premium to its domestic share price.

While the relative attractiveness versus the A-shares will likely change over the coming week—in which direction is anyone's guess—sources say prospective investors are more concerned with the price-to-book valuation and are unlikely to get too spooked by whatever happens with the share price in Shanghai.

"The key thing for most investors is that the price is set below two times book, as that will give a decent discount versus its peers," said one banker, noting that the larger comparables like China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Bank of China (BOC) all trade at about 2.2 to 2.4 times book. China Merchants Bank leads the competition with a price-to-book valuation of about 3.1 times.

Minsheng is offering 3.32 billion new H-shares, or 15% of the combined A- and H-share capital. There is also a 15% greenshoe that could increase the maximum proceeds to $4.7 billion. Five percent of the offering has been earmarked for Hong Kong retail investors, and due to the large size of the offering, the company has also obtained a waiver that caps the retail tranche at 20% even at a full clawback. If the retail offering is between 15 and 50 times covered, it will trigger an increase to 7.5%; a subscription ratio between 50 and 100 will increase the retail tranche to 10%; and above 100 times, it will result in a 20% retail tranche.

Minsheng has attracted five cornerstone investors: Yeung Chun Kam and Yeung Chun

Fan will buy a combined $100 million worth of shares; Hong Kong-listed Chinese Estates will also buy $100 million; China Overseas Finance will take $60 million; an individual named Yin Chung-yao will take $50 million; and Ping An of China Asset Management has committed to buy $30 million worth of shares.

The proceeds from the Hong Kong IPO will be used to strengthen the bank's core capital after its capital adequacy ratio fell to 8.5% in the second quarter—the second lowest among China's 14 listed banks, according to Bloomberg. A lack of capital is limiting the extent to which Minsheng can grow its loan book, and is thus preventing the bank from participating in full in the country's rapid rebound from the financial crisis.

The Hong Kong public offering will launch on Friday and stay open for the usual 3.5 days, closing on November 18, when the deal is also expected to price. The trading debut is scheduled for November 26.

UBS is the sole global coordinator for the Minsheng IPO and will be joined as a bookrunner by BOC International, China International Capital Corp (CICC), Macquarie and small China-based securities firm, Hai Tong, at descending levels of economics.

Minsheng will be in the market at the same time as Sands China, the spin-off of Las Vegas Sands' Macau operation, which is also launching formal bookbuilding today. As of last night, it was still not clear exactly how many secondary shares the parent company would be selling as part of the IPO, but the total deal is expected to be about $2.5 billion. Citi and Goldman Sachs are joint global coordinators and joint bookrunners together with Barclays Capital, BNP Paribas and UBS.

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