Cinda Market Cap (as of 22/11/13): N/A

News surfaced on Thursday, November 21st that Chinese bad bank Cinda is finalizing the details of its long awaited Hong Kong IPO, which is expected to bring in up to HK$19bn (US$2.45bn) in fresh equity financing. The company will offer around 5bn shares at a price range of HK$3.00 – HK$3.58.

The deal comes at a somewhat difficult time for the Hong Kong financial market: 2012 was a dismal year in terms of IPO volumes (US$11bn) and this year’s recovery has been somewhat muted. The slump in HK IPOs seems to be driven by two main contrasts.

First, the need and the willingness to attract more overseas listings (e.g. Prada) by making the listing process easier is in contrast with Hong Kong’s strict requirements that prohibit unprofitable companies from listing. This explains why many tech startups have no choice but to move to the US equity market. Other requirements related to the “one share, one vote” principle have made HK equity markets lose the US$10bn listing of Alibaba: the exchange refused to allow Alibaba’s partners to nominate the majority of its board because they only hold about 10% of the capital.

The second contrast is related to a divergence between investor demand and equity supply. The HK capital market is dominated by financial listings. The last month saw three Chinese banks IPOs materialize: Huirong Financial (US$200m), Bank of Chongqing (US$600m), and Huishang (US$1.3bn). Investors, however, prefer to buy shares in more dynamic sectors such as consumer, retail and technology. The shortage of investment options explains both the fortunes of the few big technology IPOs (see Tencent, up 70% this year) and the overly aggressive IPO pricing of companies in these “dynamic” sectors, which struggle to gain ground once trading starts (see Huishan Diary and Sinopec Engineering).

Cinda is the largest of four bad loan “asset managers” (the others are China Orient Asset Management Corp., Huarong Asset Management Co. and Great Wall Asset Management Corp.) set up by the Chinese Finance Ministry in 1999 in order to take up CNY1.4trn (US$170bn) of large banks’ nonperforming loans ahead of their IPO. Each of these bad banks was assigned to a major commercial bank (Cinda was assigned to China Construction Bank) and was originally given CNY10bn in capital. The bad banks then issued bonds to their reference bank in exchange for an equivalent amount of bad loans. This rather obscure system did not involve any market scrutiny on loan pricing and quality, since it really consisted of a non-monetary exchange of assets between two state owned entities.

This criticism notwithstanding, Cinda and its peers managed to achieve profitability in the past few years: their average return on equity improved from 8.9% in 2009 to 15.5% in 2012. They also expanded to become diversified financial services conglomerates spanning from insurance to securities broking, while they acquired participations in debtor firms through debt-to-equity swaps. Cinda itself posted a net income of CNY7.2bn in 2012, up 6% on the previous year, and it owns stakes totaling CNY45bn in 136 state owned companies.

Cinda has arguably been the most suited Chinese bad bank for an IPO due to both its profitability and its ownership structure. In 2012 it sold a 16.5% stake to four strategic investors for a consideration of CNY10.4bn. The buyers were China’s Pension Fund, CITIC Capital, UBS and Standard Chartered. The international nature of the two latter investors may have played a role in increased accountability on the one hand, and pressure to exit the investment through a suitable venue such as an IPO, on the other.

Cinda was advised by Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, Morgan Stanley and UBS.


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