Hong Kong IPOs: Huarong, China Re test market with jumbo listings

Hong Kong IPOs: Huarong, China Re test market with jumbo listings

HONG KONG — Debt clearing manager China Huarong Asset Management and China Reinsurance are among several state-owned giants to brave Hong Kong’s lackluster IPO market in October with offerings worth a combined $4.5 billion – the largest deals since China’s equity rally in June.

     Despite recent lukewarm interest in new listings, two smaller IPOs by IMAX China and Chinese lingerie maker Regina Miracle made strong debuts on the stock market on Oct. 8, paving the way for Huarong and China Re.

     In the first nine months of this year, Hong Kong saw 83 new listings, a fall of 7% compared to the same period a year earlier, according to PwC.

     What has caught the market’s attention is Huarong’s plan for a $2.5 billion IPO, which could be one of Hong Kong’s biggest listings since May, after the $5 billion listing by Chinese brokerage firm Huatai Securities.

     Alvin Cheung Chi-wan, associate director at Prudential Brokerage, expressed doubt that investors can digest a multibillion Huarong IPO. He said that there would be competition for investors’ money as there is a swollen pipeline of big IPOs due to come in October, including that of Chinese International Capital Corp, an investment bank looking to raise about $1 billion.

     China Re, the country’s largest reinsurer, announced on Monday that it plans to raise $2 billion and list on the local bourse on Oct. 26. It is selling 5.77 billion shares at $HK 2.25 ($ 0.29) to HK$ 2.70 each, with China Life Insurance and casino heiress Pansy Ho already among its cornerstone investors.

     “It’s not a good sign for Huarong,” Cheung said.

     Huarong is the largest, by assets, among the four debt clearing companies set up by Beijing in 1999 to repackage some 1.4 trillion yuan ($220 billion) in bad debt from China’s state-run banks. It is the second of the four so-called “bad banks” to go public, after China Cinda Asset Management’s $2.8 billion IPO in 2013.

     A prevailing view is that China’s slowdown presents opportunities for debt clearing companies like Huarong. “It’s a buyers’ market for non-performing loans now,” said Harry Hu, credit analyst at Standard & Poor’s, as banks are willing to sell distressed assets to these companies at a discount.

     NPLs of China’s banking sector reached 1.8 trillion yuan in June, up nearly a third from a year ago, according to the country’s banking regulator.

     The slowing Chinese economy will weigh on Huarong’s short-term prospect. “A business that trades on bad debts will be tough,” said Prudential Brokerage’s Cheung, adding that he did not see a sharp rise in Huarong’s share price six to nine months after its listing.

     Analysts estimate that Huarong’s price-to-book ratio is around 1.2 times. But its closest rival, Cinda, is now trading at a record-low price-to-book ratio of below 1 after its share prices tumbled by nearly 50% from its peak in July.

     Huarong’s hands are also tied if it wants to lower its share price offer as Chinese regulators do not allow state-owned enterprises to sell shares at a discount to book value. Huarong is being advised by CICC, HSBC, ICBC, Citigroup and Goldman Sachs.

     “How much Huarong will sell its shares remains critical,” said Dickie Wong, executive director of research at Kingston Securities, although a silver lining is that Huarong, alongside CICC, are sizable corporates with strong financial backing from Beijing.

     “The fact that these companies are big in scale means reception to their IPOs won’t be too bad,” said Wong, adding that the traditional wisdom is that SOE shares offer little room for speculation and attract largely long-term investors.

     Meanwhile, China Re, whose clients include 93% of the country’s insurance companies, was the eighth largest insurance group in the world and Asia’s largest in terms of reinsurance premium income last year. Its IPO is the first of its kind in Hong Kong.

     According to its prospectus, China Re’s estimated loss of between 900 million yuan to 1.1 billion yuan from the deadly Tianjin blast in August is likely to weigh on its net profit for 2015.

     The scale of these SOE listings should inject some vigor into Hong Kong’s IPO scene that had been dominated by small-cap listings in the third quarter. The slump in stock valuations and potential U.S. rate hikes have dampened market sentiment and delayed other listing plans.

     Shares of widescreen provider IMAX China surged 10% in its trading debut on Oct. 8 despite an underwhelming response in its initial subscription. Shares in Regina Miracle, which supplies bras to Victoria’s Secret, closed up 16% on the same day. The two IPOs raised a combined $460 million this month – a modest amount after a long IPO drought.

     Smaller IPOs such as those by Inner Mongolia-based Hengtou Securities and Dairy firm Lanzhou Zhuangyuan Pasture drew little interest. The only exception is cosplay product maker China Partytime Culture, which was reportedly oversubscribed by 200 times in its HK$212 million public offering.

     PwC’s assurance partner Benson Wong said that the last quarter is traditionally the “peak season” with most jumbo listings due by year-end. The consulting firm sees Hong Kong as the world’s top IPO destination this year with HK$250 billion worth of listings by some 120 companies. 

Hong Kong IPOs: Huarong, China Re test market with jumbo listings