Banking

AgBank wins wealth funds for $23b IPO

(Agencies)
Updated: 2010-06-15 14:00

A pedestrian walks past a logo of Agricultural Bank of China in front of its headquarters in Beijing June 14, 2010. The Agricultural Bank of China is seeking to raise more than $23 billion through a dual Hong Kong and Shanghai listing, according to documents on Monday, putting it on course for the world's biggest IPO. [Agencies]

The Agricultural Bank of China is seeking to raise over $23 billion by listing in Hong Kong and Shanghai in what would be the world's biggest IPO, as China's banks shore up their capital base after a lending spree.

The lender has secured a number of international cornerstone investors to take up to 40 per cent of the Hong Kong portion of its initial public offering.

The offering of preferential shares to cornerstone investors is common in China and is used to ignite investor interest and show the deal has strong financial backing.

On Monday, Asia's third and fourth richest individuals have signed up as cornerstone investors, a report said.

Cheung Kong (Holdings) chairman Li Ka-shing and chairman of Henderson Land Lee Shau Kee will each subscribe to HK$1 billion ($128.3 million) of AgBank shares, Infocast News reported on Monday.

Li, Asia's third wealthiest person who Forbes says is worth $21 billion, and Lee routinely subscribe to large, Hong Kong IPOs.

The sovereign wealth funds of Kuwait, Qatar and Singapore have agreed to take a portion of the shares on sale in Hong Kong before Agricultural Bank of China begins marketing them to institutional investors.

The initial public offering by AgBank, founded in the 1950s as the central bank's rural arm, had previously been touted as high as $30 billion, but has been scaled back as China's stock market has dropped by more than a fifth this year and global markets have been spooked by a euro zone debt crisis.

AgBank's offering comes as China's second-largest wind turbine maker, Xinjiang Goldwind Science & Technology Co, pulled a $1.2 billion IPO, the fifth Hong Kong offering to be shelved since last month, citing weak markets.

Around $3.8 billion in public offerings has been shelved in Hong Kong in recent weeks.

While backing from the state and the presence high-profile cornerstone investors should ensure the offering goes ahead despite weak market sentiment, there have been question marks over AgBank's value and performance.

Antonny Cheng, managing director at Gain Asset Management Ltd, said he does not expect to invest in AgBank.

"It's the weakest among the big four state banks in terms of loan quality," he said, noting the market drop had left other high quality companies looking cheap.

The Hong Kong portion of AgBank's IPO seeks to raise up to $14.4 billion, including a 15 percent overallotment set aside for the after-market, according to a term sheet obtained by Reuters on Monday. The Hong Kong offer is 53.3 percent of the total deal.

Including the Shanghai offering and the overallotments, AgBank could raise more than $27 billion, far exceeding the previous biggest IPO -- the $21.9 billion raised by Industrial and Commercial Bank of China (ICBC) in 2006.

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The bank, China's third largest with $1.4 trillion in assets, began the pre-marketing for the IPO on Monday, involving research from underwriters that gave markets previously undisclosed financial information and forecasts.

The most critical part of any IPO is assigning a value to the company that executives and investors are comfortable with. For banks, the key number is the book value -- total assets minus liabilities.

AgBank's forecast valuation for 2011 is 1.57 to 1.97 times price-to-book, according to one of the underwriters, Macquarie, whose research was obtained by Reuters through a fund manager who did not want to be identified.

At a rough midpoint, AgBank -- which has more customers than the United States has people -- would be valued above Bank of China and three of seven large Chinese banks.

CICC, another underwriter, said: "Macro uncertainties have recently depressed trading multiples of Chinese banks. We expect ABC should trade at a small discount to ICBC and CCB (China Construction Bank)."

Supporters of AgBank say it has cleaned up its books and has stronger growth potential than other major Chinese lenders.

"The company is cutting down on its non-performing loan ratio and raising its operating efficiency," said a fund manager who was not authorized to speak on the record, but who noted various forecasts for AgBank to show 30 percent compound annual growth in net profit for 2009-12.

KEY INVESTORS

Beijing-based AgBank, best known for its customer base that spreads across China's far-flung regions but which has a major presence in most big cities, is run by Xiang Junbo, 53, a scriptwriter and war hero, who previously served in top posts in China's central bank and National Audit Office.

The Kuwaiti and Qatari sovereign funds have taken allotments of about $1 billion each. Temasek, the Singaporean sovereign fund, plans to invest up to $300 million in the IPO, a source with direct knowledge of the matter said on Saturday.

The Hong Kong H-share offering is set for a July 16 debut, the term sheet said. AgBank will use the IPO proceeds to strengthen its capital base and support business growth. Its management and government officials have told bankers they want to see shares jump at least 10 per cent on its trading debut.

AgBank has nearly 24,000 branches and employs more than 441,000 people, eclipsing ICBC and CCB, the world's two biggest banks by market value.