FINANCE – Qatar Ties With Citic, PICC Bulks Up
Bottom line: Qatar’s new $10 billion China-focused investment fund and PICC’s new rights offer spotlight growing distress at Chinese companies, presenting a buying opportunity for opportunistic investors.
Two big finance stories are highlighting an interesting divergence in the China market, which has some investors bullish on new opportunities even as actual financial institutions and many other companies brace for a major downturn. The former instance has the Qatar Investment Authority (QIA) in a major new initiative to set up a $10 billion China investment fund with local financial giant Citic Group. At the same time, the growing distress in China’s financial sector is also apparent in a new plan to raise $1.2 billion by PICC (HKEx: 2328), China’s largest non-life insurance company.
Savvy investors will know that big institutions like QIA, Qatar’s sovereign wealth fund, often like to make big investments during downturns when valuations are depressed due to broader market pessimism. Based on that premise, anyone with a high tolerance for risk might well consider investing in China’s financial sector at this time. I made a similar observation earlier this week, noting that shares of China’s big 4 state-owned banks might offer some potential upside over the next year, following a recent sell-off sparked by concerns about their dwindling profit growth and rapidly rising bad loans. (previous post)
All that said, let’s start this financial news review with the bigger of the 2 deals, which has QIA and Citic signing a memorandum of understanding (MOU) to launch their $10 billion fund targeting investments in Asia, with a focus on China. (English article; Chinese article) Each partner will own 50 percent of the fund, which is part of QIA’s effort to diversify away from its traditional focus on European investments. The fund itself won’t invest in the financial sector, but rather will focus on infrastructure, property and healthcare.
The reports note that the Qatar wealth fund has traditionally been an aggressive investor, and that this new joint fund with Citic is part of a broader plan to invest $15-$20 billion in Asia over the next 5 years. Still, the timing of the fund’s formation certainly looks at least partly opportunistic, aimed at finding Chinese assets that may have become undervalued during the country’s rapidly building economic slowdown.
The latest signs of that downturn are evident in our second financial news bit, which has PICC Property & Casualty seeking to raise its $1.2 billion through a rights offering linked to its Hong Kong-listed shares. (English article) Under the plan, holders of PICC’s Hong Kong shares would receive the right to buy 0.9 rights shares for every 10 shares they currently hold. The rights shares would sell for HK$7.46 each, representing a discount of 47 percent to PICC’s last closing price before the announcement.
This kind of rights offer is one of several fund-raising tools being used by Chinese banks and other financial institutions lately to bolster their balance sheets undermined by bad investments. Other tools include bond sales, and more recently the banks have turned to the sale of preferred shares. Those preferred share sales have become a backdoor vehicle to tap the central government for the billions of dollars the banks need to restore their balance sheets to healthy levels.
The banks’ balance sheets are being undermined by billions of dollars in dubious loans made as part of Beijing’s economic stimulus plan during the financial crisis. Insurers like PICC are being undermined by a weak stock market, as well as the very real potential that domestic debt issuers that also raised money for dubious projects during the financial crisis may end up defaulting on big portions of their debt.
In this case the size of PICC’s fund raising doesn’t look too large, meaning it’s currently not anticipating too much turmoil from the downturn. If that’s the case, the company could be in relatively good shape compared to many of its peers. Accordingly, its shares could be a good buy over the longer term, though they could also be due for a short-term pull-back after a rally of more than 50 percent over the last 6 months.
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