Too many variables at stake to fix value ahead of mid-July flotation

BEIJING - While the Agricultural Bank of China (ABC) prepares for a mega-float in mid July, analysts and bankers close to the listing are saying it is still too early to hazard an intelligent guess at the offering price.

Sources indicated the bank was likely to seek Shanghai and Hong Kong listing committee approval on Thursday. Speculation has been rife over how much shares in the country's third largest lender by assets will go for. It is expected to become the world's largest initial public offering (IPO) and will largely complete China's decade-long overhaul of government banks.

"The lender is yet to fix its issue price because it can only be decided after making road shows. There are several factors - such as the company's growth prospects, investor demand and market conditions - being taken into consideration," said Pan Gongsheng, vice-president of the bank.

ABC plans to issue up to 51.4 billion shares in its mid-July float, accounting for 16 percent of its total capitalization, even though the size is still subject to the development of market conditions, sources with knowledge of the matter told China Business Weekly.

With several major lenders lining up to raise funds from the market after the record credit expansion last year, ABC wants its float to hit the bourse ahead of its Chinese peers. However, recent volatility in the market has cast a shadow over the outlook of the listing.

The Shanghai Composite Index has dropped some 19 percent since mid-April on concerns that stringent tightening measures might drag down economic growth, while Hong Kong's benchmark Heng Seng Index has declined some 8 percent over the same period over fears of fallout from the European fiscal crisis.

However, analysts said the correction in the markets made ABC's shares more attractive to investors, since Chinese banking shares are now trading at lower price-to-book multiples.

ABC's three major state-run peers, Industrial and Commercial Bank of China, China Construction Bank and Bank of China, are currently traded at about 1.8 times their 2010 price-to-book multiples, which could give clues regarding ABC's share price, analysts said.

After several rounds of talks, several Middle Eastern sovereign wealth funds, including Kuwait Investment Authority and institutional investors from the United Arab Emirates, have expressed keen interest in becoming cornerstone investors for ABC's IPO.

Before that, China's national pension fund has invested $2.2 billion and is the only strategic investor that the bank roped in before its IPO.

As a major lender specialized in serving the country's 800 million farmers and agricultural sector, ABC received tax cuts for its rural lending unit covering 561 county-level branches in eight provinces in May, a move that analysts expect could boost the lender's profitability by some 5 billion yuan.

The bank's chairman, Xiang Junbo, said in an earlier interview that the lender boasted huge potential for growth thanks to its extensive rural network, given that urbanization is going to be the country's main theme over the next 10 years.

Last year, ABC posted a net profit of 65 billion yuan, up 26.3 percent from a year earlier. The capital adequacy and bad-loan ratio stood at 10.07 percent and 2.91 percent respectively by the end of last year.

China Daily

(China Daily 06/07/2010 page14)