IPOs: CICC Trims IPO, Weak Debut in Store

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Bottom line: CICC’s IPO will price and debut weakly due to uncertainty about its prospects following recent management turmoil, though the stock could do well over the longer term if its new executive team performs well.

Investor unimpressed by CICC offering

Chinese investment bank CICC is quickly discovering just how much its fortunes have faded, with word the former financial superstar has scaled back its Hong Kong IPO by 20 percent due to lack of investor interest. Just a month or two ago CICC might have been able to blame the lukewarm sentiment on the broader market, as a massive sell-off on China’s A-share markets infected Hong Kong. But strong recent demand for 2 major new listings in Hong Kong shows positive sentiment is returning, and that CICC is being left out of the rebound.

IPOs by Chinese companies have come creaking back to life in Hong Kong lately, led by last week’s strong debut for IMAX China (HKEx: 1970), the Chinese unit of Canadian big-screen theater technology company IMAX (NYSE: IMAX). Since debuting last week, IMAX China shares have risen by a third on big hopes for rapid expansion in China’s theater market. Last week, the stodgier China RE insurance company also priced shares for its upcoming $2 billion Hong Kong IPO at the top of their range, after getting strong demand.

But investors look decidedly tepid on CICC’s offering, which has been scaled back to a maximum fund-raising target of $800 million from a previous one of up to $1 billion. (English article) The reports say CICC made its decision after failing to get the valuation it was seeking during its earlier marketing of the plan.

The company will start taking orders for the offering next week, and set a final price on October 30, according to a report citing unnamed banking sources. The shares will make their debut on November 9, ending a long and somewhat tortured process that finally puts a value on this company that was originally the China investment banking joint venture of Morgan Stanley (NYSE: MS).

Failure to get much interest from investors comes as no surprise at all, and I expect CICC may have to cut its fund-raising target further still before it finally makes its debut next month. The fact that it’s cutting so much, even in the face of a relatively strong market for new offerings, testifies to just how much the company’s star has faded since its heyday in the first decade of the 21st century.

Founded in 1995, CICC’s name was a regular fixture on most of major offshore IPOs by big Chinese state-run companies, most of those in Hong Kong, during its heyday. The company drew heavily on its political connections during that time, as its founder and chief executive Levin Zhu was the son of former Chinese Premier Zhu Rongji.

Fading Family Influence

But the Zhu family’s influence has faded as China ushered in a new generation of top leaders, causing CICC’s own fortunes to fall as well. In a surprise move Levin Zhu resigned as CICC’s CEO last October. His departure was followed by the resignation of CICC Chairman Jin Liqun a short time later, throwing the company into management turmoil and delaying plans for the IPO.

Despite all those issues, CICC has plowed ahead with the IPO plan and is now finally coming to market. In some ways I have to commend the company for its tenacity, since many other firms might have abandoned such plans after experiencing the kind of turmoil that CICC has faced over the last few years.

I do expect the shares to price weakly and the final fund raising to come in lower than the target, perhaps finishing in the $600-$700 million range. Much of that weakness will owe to investors’ lack of familiarity with this new CICC, which will have to rely on its own abilities rather than government connections to survive and thrive in the future. it’s still possible it could thrive over the longer term due to its roots and historical ties, but such factors are unlikely to provide near-term help for what’s likely to be a lackluster pricing and trading debut.

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