BOC Announces Cautious IPO Price Range

by Mary Swire, Tax-News.com, Hong Kong

09 July 2002

Hong Kong investors were surprised on Monday when the Bank of China announced a price range for the upcoming IPO of its SAR subsidiary, Bank of China (Hong Kong) which was well below the expected level.

Presumably with an eye to rocky equity markets and some less than flattering research issued lately querying its key banking ratios, BOC said it would raise up to HK$25 billion by offering 2.64 billion shares in a price range of HK$6.93 to HK$9.50, implying a multiple of between 12 times and 16 times earnings. The market had expected a price range of HK$7.70 to HK$11.80.

The offer will be made on July 25 by BOC Hong Kong (Holdings), owner of 100% of Bank of China (Hong Kong).

Bank of China (Hong Kong) was formed last year through a merger of ten different Bank of China subsidiaries and affiliates in Hong Kong and Shanghai. A research report issued by sponsor Goldman Sachs last week caused some negative reactions in the market. The bank is the largest lender in the SAR, but according to the report, non-performing loans stood at 11% at the end of last year compared with the industry average of 4.5%, and the bank has heavy exposure property markets in the SAR, with 32% of lending to property development or investment concerns. Parent Bank of China says it has no plans to inject mainland banking assets into BOC (HK).

Goldman Sachs estimates that 33% of the bank's non-performing loans are to mainland-related borrowers at the end of last year, and 30 per cent of its mainland-related loan portfolio is non-performing. The brokerage - one of the lead managers of the initial public offering - estimates that a 10% fall in local property prices could result in a 48% reduction in net profit this year from the current estimate of HK$6 billion.

Many investors have been assuming that such research is unofficially blessed by the BOC, but on the insistence of regulators the bank has disassociated itself from the research reports produced by its underwriting brokerages.

Last year the bank earned profits of HK$2.77 billion (down 47%); this year, the bank's profit is expected to be between HK$6.94 billion and HK$7.43 billion, rising to between HK$8.99 billion and HK$9.3 billion in 2004.

The bank's vice-chairman and chief executive Liu Jinbao said that 90% of the IPO would be allotted to institutional investors, with retail investors being offered a 5% discount on the remaining 10%.

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