FOCUS: Investors Remain Lukewarm About Agricultural Bank IPO

17th Jun 2010 11:08

By Ellen Sheng Of DOW JONES NEWSWIRES HONG KONG (Dow Jones)--A chance to invest in one of China's major banks and get a stake in the country's long-term growth potential would have investors drooling in the past but in the case of Agricultural Bank of China Ltd., the last of the Big Four to list, fund managers aren't exactly queuing up. Even as the up-to-$28 billion initial public offering is attracting large cornerstone investors -- the likes of Singapore state investment company Temasek Holdings and Hong Kong tycoons Li Ka-shing and Lee Shau-kee -- long-term institutional investors remain reserved. Long seen as the weakest of China's four large state-owned banks, AgBank has the least attractive performance metrics with a bigger legacy of bad loans, managers and analysts say. Loans in rural areas accounted for 30% of its loans in 2009 -- an area of banking with higher operating costs and a high rate of non-performing loans. Further dimming enthusiasm for AgBank's listing are rocky market conditions. Just this week, two other Hong Kong IPOs were pulled from the market - Xinjiang Goldwind and World Wide Touch Technology - amid weak demand. Moreover, with stronger Chinese banks such as Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. already trading at attractive valuations, AgBank needs a hefty discount to make buying its shares worthwhile, managers said. "The Euro debt crisis, worries for a slowing Chinese economy, and massive fund raising by Chinese banks have led to reduced expectations," said Andy Mantel, fund manager at Pacific Sun Investment Management, a China-focused hedge fund which currently has a net short position on Chinese banking stocks, in part due to the large capital raising by Chinese banks and equity dilution for some banks. Chinese banks plan to raise some $70 billion in coming months to replenish capital. Aware of the tough market conditions, AgBank has already lowered the size of its IPO from an original target range of $20 billion to $30 billion and is setting aside a large portion of its listing for cornerstone investors. Cornerstone investors help ensure a listing's success as such investors agree not to sell shares for a set amount of time, usually six to 12 months. Some of the cornerstone investors lined up already for the Hong Kong listing include Standard Chartered PLC as well as middle Eastern sovereign-wealth funds Qatar Investment Authority and Kuwait Investment Authority, according to people familiar with the deal. The Shanghai Stock Exchange said Wednesday that it will allocate 40% of the Shanghai portion of the listing for cornerstone investors - a bigger allocation than prior state-bank IPOs have offered. Some 30% to 40% of the Hong Kong portion of the listing is also expected to be reserved for cornerstone investors. Managers say appetite for the remaining 60% to 70% of the IPO will depend on price. Most are looking for a discount to AgBank's peers that would bring the total offering to around $20 billion, closer to the lower end of the target range. AgBank's "operations have been less impressive than the other 'big 4' SOE banks in recent times...I would expect a reasonable discount of 15% to 20% to the others," said Chris Ruffle, China and Taiwan portfolio manager at Martin Currie in Shanghai, a small to mid-cap investor who does not invest in many state-owned companies. One fund manager, who declined to be identified, said he "hasn't been so hot" on the AgBank deal, preferring to buy shares of other, stronger Chinese banks instead. "As stock pickers, we don't need to care about Agricultural Bank," he said, especially since other Chinese bank shares are "quite attractive" at the moment. With ICBC trading at about 2 times book value, AgBank should be priced at about 1.6 times book value, he said. With "too many deals of low quality" clogging the IPO pipeline recently, in a rocky market, there's good reason to stay away, the manager said. Still, there's no doubt the deal will get through given Beijing's determination and resources to make the IPO a success. "The deal will get done...fund managers can't afford not to participate, for index purposes," said one Hong Kong-based banker who isn't advising on the IPO. Despite the lukewarm investor interest, Beijing is pushing ahead with the deal, even aspiring to make it the biggest IPO in the world if AgBank raises more than the $22 billion ICBC raised in 2006. "This is a bold move for this state-owned bank, the fourth and last to go public, and highlights just how hungry China's economy is. As with other large scale listings of major Chinese State-owned enterprises, the China Agriculture Bank IPO is very much politically driven as much as anything else," said Stephen Mok, partner in the Hong Kong office of international law firm Eversheds. -By Ellen Sheng; Dow Jones Newswires; 852-2832-2336; [email protected] (Nisha Gopalan contributed to this article.) (END) Dow Jones Newswires June 17, 2010 06:08 ET (10:08 GMT)