IPOs: Bank of Jinzhou Sags in HK, STO Stumbles in Shenzhen

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Bottom line: Lukewarm receptions for new IPOs by Bank of Jinzhou and STO Express reflect investor concerns about Chinese banks and parcel delivery firms, and more broadly worries about China’s economic slowdown.

STO Express races toward Shenzhen listing

The New York market for Chinese IPOs may be dormant as 2015 draws to a close, but Hong Kong and China’s domestic markets are buzzing this week as Beijing lifts a months-long ban on new offerings imposed during a major summer sell-off. As new listings resume, investors are showing strong skepticism towards 2 of the more market-oriented offerings getting set to hit the market, one in Hong Kong from regional lender Bank of Jinzhou (HKEx: 416) and the other in Shenzhen from leading private parcel delivery firm STO Express.

Both of these offerings are probably better indicators of true market sentiment than the many other IPOs getting set to launch in Shanghai and Shenzhen with the end of the 4-month ban. That’s because investors in both of these deals are more market oriented,  unlike many of the other deals whose shares are being purchased by mainland speculators who have little interest or understanding of the companies they’re buying into.

Bank of Jinzhou’s IPO is more market-oriented because it’s happening in Hong Kong, where investors traditionally buy stocks more based on company fundamentals than their peers across the border in China. That has created difficulties for the company due to market concerns about a bad debt crisis in China, which has sharply undercut the pricing of Bank of Jinzhou’s IPO stock.

Meantime, STO’s IPO is also relatively market-oriented because it’s a backdoor listing, which means it can’t openly sell new shares and thus needs to figure out its proper valuation before the listing. The offering is also quite interesting because it’s the first for a new generation of parcel delivery companies that have thrived on China’s e-commerce boom, but are also struggling for profits due to intense competition.

All that said, let’s return our attention to Bank of Jinzhou, which has just priced shares for its Hong Kong IPO near the very bottom of their previously announced range. (English article; Chinese article) The company ultimately priced the shares at HK$4.66, or just a tad above the bottom end of the range of HK$4.64 to HK$5.54. The pricing will allow the bank to raise about $800 million, or about 15 percent below its original target.

This weak pricing doesn’t come as a huge surprise, since last week another Chinese regional lender, Qingdao Bank (HKEx: 3866), got a similarly chilly reception for its own Hong Kong IPO. (previous post) Investors are generally bearish on all Chinese state-owned banks at the moment, since most are believed to be sitting on large piles of bad debt due to dubious loans they made under Beijing’s massive economic stimulus plan during the global financial crisis.

STO’s Tepid Valuation

Next let’s look at STO Express, which has just announced some figures that indicate what kind of valuation it’s seeking through its previously announced backdoor IPO using a Shenzhen-listed firm called IDC Fluid Control (Shenzhen: 002468). A new filing by IDC indicates it will pay a total of 16.9 billion yuan ($2.7 billion) for all of STO’s assets. (Chinese article)

The injection of STO’s assets into IDC is being done through a two-part deal, which will see IDC initially buy 80 percent of STO’s assets in exchange for new shares. IDC will then pay cash to STO’s top managers for the remaining 20 percent of the company, giving it 100 percent of the shares and completing the backdoor listing.

I have yet to see any financials for STO, but this relatively low valuation of $2.7 billion indicates the company is probably losing big money despite its status as one of China’s top 5 private parcel delivery companies. That status is unlikely to change for at least the next 2 years despite the market’s big growth potential, though we’ll have to wait for the newly listed company’s maiden earnings report before we can see just how much money it’s losing.

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