IPOs: Qingdao Leads Chilly Reception for China Bank IPOs in HK

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Bottom line: Hong Kong IPOs by Qingdao Bank and Bank of Jinzhou will debut weakly due to concerns about their bad debts, and sentiment is unlikely to improve towards regional Chinese lenders anytime soon.

Qingdao Bank IPO prices weakly

The only thing worse than a national Chinese lender is one of the country’s hundreds of smaller local banks. That’s the message coming from investors this week, as a chilly reception for a new offering from Qingdao Bank (HKEx: 3866) has forced the lender based in eastern Shandong province to slash its fund-raising plan by 10 percent. The news is a bad sign for Bank of Jinzhou (HKEx: 416), based in nearby Liaoning province, which is a few steps behind with its own IPO seeking to raise up to nearly $1 billion.

Two factors are undermining these IPOs by China’s regional banks, which have been flocking to market in the last 2 years after listings by most of the nation’s biggest lenders a decade or more ago. The most immediate factor is a resumption of IPOs on China’s domestic markets, which is set to occur next week after a half-year pause. The second is a broader issue, namely the fact that most of these lenders are sitting on mountains of questionable loans that will probably go bad in the next 1-3 years.

We’ll return to the bigger picture shortly, but first let’s review the latest progress in Qingdao Bank’s IPO that was originally set to raise up to $666 million when underwriters began taking orders for shares about a week ago. It seems investors weren’t so excited about the stock, and Qingdao Bank ultimately sold the shares for HK4.75 each, which was at the very bottom of their previously announced range. At that level the bank will raise about $600 million. (English article; Chinese article)

Some may say that at least Qingdao Bank didn’t have to scale back the actual size of its share sale, which would have indicated even weaker demand. But Chinese media are pointing out the company was only able to achieve that goal after calling on many of its “friends” to buy shares. One report says 72 percent of Qingdao Bank’s IPO shares were bought by such investors, which often include locally based state-owned institutions linked to companies’ hometowns, in this case the picturesque city of Qingdao.

Chilly Reception for Jinzhou Bank

Those same reports say that Bank of Jinzhou’s IPO is meeting with an even chillier reception. The marketing period for the offer officially ends today, but as of Thursday the company had only received guaranteed orders for a paltry HK$600,000 worth of stock from 4 of the underwriters involved in the deal. That was a tiny fraction of the figure of up to HK$731 million they were aiming to sell.

Bank of Jinzhou had originally hoped to raise up to $943 million through the share issue, setting an original price range of HK$4.64 to HK$5.54. (English article) But if the reports are correct, the bank may have to scale back its offering size or make some last-minute calls to more of its local “friends” to ensure the offering is fully subscribed. The only problem is that Bank of Jinzhou comes from Liaoning, which is less affluent than Shandong province, and thus may have less cash-rich friends to come to its assistance.

I haven’t seen financials for either company, but it probably doesn’t matter since Chinese banks are famous for finding ways to hide their bad loans. In this case both banks probably have far more problematic loans than they’re disclosing. That’s true of most local Chinese lenders, which made billions of yuan in dubious loans under orders from their local government masters as part of a massive Beijing-led stimulus plan during the global economic crisis.

Investors are well aware of this issue, which is the main factor weighing on China bank stocks in general right now. As a result I expect that Qingdao Bank’s IPO will debut weakly when its shares begin trading next Thursday, and Jinzhou bank may have to scale back its offering and reduce its fund raising target by 30 percent or more.

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