Agricultural Bank of China may struggle to get the kind of valuation it wants as it gears up to launch the world's biggest IPO into a market that has slumped by a fifth in just six weeks.
China's market <.SSEC> drop is one of several factors prompting potential investors to query whether AgBank, China's fourth-biggest lender by assets, is worth the 1.6 times book value being bandied around in the market.
The bank, whose 350 million customer base is bigger than the population of the United States, is expected to open pre-marketing of its roughly $30 billion initial public offering within the next week, aiming to list its A-shares in Shanghai on July 15, and its Hong Kong H-shares a day later, according to sources, one of whom said the bank would seek Hong Kong listing committee approval on June 10.
Hong Kong's market <.HSI> is down 11 percent since mid-April.
The China Daily newspaper reported on Wednesday that AgBank could cut the size of the IPO if markets remain volatile, citing a source close to the bank.
Beijing-based AgBank's big domestic rivals trade at near or above 1.6 times book value.
According to a BofA Merrill Lynch report, Industrial and Commercial Bank of China (ICBC) <1398.HK> trades at 2.1 times 2010 price-to-book, Bank of China <3988.HK><601988.SS> at 1.5 times, and Bank of Communications <601328.SS> at 1.8 times -- averaging around 1.8 times.
Some think AgBank is worth around that. Others less so.
We're not interested in AgBank at all if its IPO is priced at 1.6 times book value, said a fund manager at Bank of China Investment Management Co, who declined to be identified because he was not authorized to speak publicly to the media.
AgBank has been seen as the weakest of China's Big Four lenders, with limited growth potential and big exposure to risky assets such as local government infrastructure projects.
The company is going public to complete Beijing's mission of listing its top banks, and to raise money at a time when China's major financial groups are boosting capital ratios after a lending spree.
How can AgBank expect such a valuation at a time when one can pay less for shares of a better bank in the market? the fund manager asked, adding he would only consider investing if the IPO was priced at 1.2 or 1.3 times price-to-book - tops.
He noted AgBank's selling point - a potential tax rebate from the government - would have only limited earnings impact.
Another fund manager, however, who also did not want to be identified as he was not authorized to speak publicly to the media, said a valuation of 1.6 times 2010 price-to-book would be acceptable, though 2 times book would be too high.
Chinese media have said AgBank plans to sell 12-18 percent of itself, a fairly normal chunk given the size of the offering. According to its latest available public filing, AgBank has total assets of 7.1 trillion yuan ($1.04 trillion).
One barometer investors are watching is the performance of Minsheng Bank <1988.HK>, China's seventh-largest listed lender which raised $3.9 billion in November. Its shares are trading 16 percent below its HK$9.08 offer price.
Minsheng Bank was valued at 1.7 times 2010 estimated book value prior to the IPO.
China-focused private equity fund Hopu Investment Management originally planned to invest up to $1 billion in Minsheng, but canceled at the last minute because it was not willing to pay more than HK$9 a share.
China's other major listed state banks -- China Construction Bank <0939.HK><601939.SS> and Bank of China -- have raised more than $15 billion and $13 billion respectively in Hong Kong and Shanghai IPOs.
(Additional reporting by Kennix Chim and Fiona Lau in HONG KONG, Editing by Ian Geoghegan)