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Another state-owned bank joins Chinese spin-off listing spree in Hong Kong

Beijing's push for deleverage and mixed ownership reform drives new deals

HONG KONG -- Instead of seeing fresh names coming forward, Hong Kong's listing market so far this year has been largely a case of deja vu, with the bigger deals mostly being launched by established Chinese corporations seeking to capitalize on their assets and rejig ownership structures.

Following conglomerate China Everbright Group's divestment of its green technology business in a $389 million initial public offering in Hong Kong last month, Bank of Communications, China's fifth largest lender by assets, listed its investment banking unit BOCOM International Holdings on Hong Kong's main board on Friday in a deal worth $229 million.

Chairman Tan Yueheng kicked-off BOCOM International’s stock trading on May 19. (Photo by Joyce Ho)

The new shares, of which 75% are owned by the parent company, opened and closed at 2.72 Hong Kong dollars, 1.5% higher than the offer price. Of the 14 book-runners involved, all except HSBC were based in mainland China.

"A spin-off signifies a more market-oriented, and independent, form of competitiveness," said Tan Yueheng, chairman of BOCOM International, speaking at the listing ceremony on Friday morning. He was joined by Niu Ximing, chairman of the bank's Shanghai-based parent, which signaled in March that more similar spin-offs are to come.

"We will pursue our international business in an orderly and progressive fashion after listing, starting from the regions surrounding Hong Kong," said Tan, who was in an exuberant mood at the event. He told reporters that BOCOM International, which relies for its income on providing brokerage, margin financing, and underwriting services, will do well amid China's deleveraging process.

Last year the company reported a 29.5% year-on-year decline in fee income and a 6.7% drop in interest income. Boosting its trading book and cutting tax expenses helped its profit grow 0.06% on the year to HK$351 million ($45 million).

"[Deleveraging] is good for the capital markets of both the mainland and Hong Kong in the long run. Financial institutions like us will benefit from China's economic rebalancing," said Tan.

BOCOM's transaction, as most analysts agree, signifies a secular trend that sees Hong Kong's capital market being used as a key platform for state-backed mainland companies to shore up their balance sheets, obtain more offshore financing vehicles, and extract market value for their growing lines of non-core businesses.

The deal pipeline includes planned spin-offs of China Petroleum & Chemical (Sinopec)'s retail operation that might potentially fetch $10 billion, PetroChina's natural gas and crude oil transportation system which is estimated to be worth at least $85 billion, and China Tower, an infrastructure joint-venture between the three mainland telecoms operators, namely China Mobile, China Telecom, and China Unicom.

Last year, Bank of China spun off its Singapore-based aviation leasing subsidiary in a Hong Kong IPO, while policy lender China Development Bank mirrored that move by capitalizing on its financial leasing arm. Conglomerate China Merchants Group also floated shares of its brokerage offshoot on the Hong Kong stock exchange. More often than not, a huge stake of the newly-listed entity is retained by the parent.

Reform push

The phenomenon, as some market observers pointed out, is fueled by Beijing's push to deleverage its debt-laden corporate sector, which is still dominated by the state amid the ongoing ownership reform for more private capital.

"Groups facing high levels of gearing will try to go for a spin-off, try to keep an equity stake in the business, and try to raise cash to replenish their balance sheets. It's a deleveraging process," said Francois Perrin, portfolio manager with a China mandate at asset manager East Capital. He noted that state-owned enterprises tend to conduct a spin-off at "the latter stage of an industry cycle," meaning growth potential is generally limited.

"I saw a number of proposals that came out to establish 'yield' companies where cash flow generating assets are put together," said Perrin, referring to various spin-off cases, especially in the environmental and infrastructure sector. "Instead of opening up their own shareholding structure, they create an entity where they can inject some private money," said Perrin. "It's a yield proposal, not a growth proposal."

Apart from releasing financial pressure from parent companies and providing extra cash for expansion, listing non-core spin-off units in Hong Kong also serves to expand companies' range of financing tools, according to Binglin Wang, analyst at Shanghai-based event-driven research firm Red Pulse.

Since February the China Securities Regulatory Commission has been trying to curb additional fundraising by A-share companies by capping private placements at 20% of the listed companies' share capital and banning share-sale applications that are made too frequently. The initiative chimes with President Xi Jinping's call to rein in financial risk.

"Hong Kong markets are relatively more mature and liquid than mainland markets, which is especially attractive for Chinese firms undergoing complex ownership reforms," said Wang, highlighting that such flotations serve as "a quicker source of equity financing," and help minimize mainland regulators' scrutiny on overseas mergers and acquisitions, especially against the backdrop of capital outflow restrictions.

'To Chinese companies, Hong Kong remains the most convenient place to set up an offshore platform to tap foreign funding," said Alicia Garcia Herrero, Asia Pacific chief economist at French bank Natixis. She believes that Chinese companies' need to secure offshore funding will prompt more spin-off IPOs and secondary listings in Hong Kong, especially among banks and conglomerates looking for revaluation.

Edward Tse, founder and chief executive of China-focused Gao Feng Advisory Company, also believed Hong Kong's capital market was being tapped for mixed-ownership reforms, yet frequent interference by the State-owned Assets Supervision and Administration Commission (SASAC) in state-owned enterprises may prove counter-productive.

"For mixed ownership to take place effectively, the role of SASAC has to be re-defined," said Tse. "But it's unclear if and when that will happen."

According to financial data provider Dealogic, Hong Kong has helped 46 companies print a total of $4.88 billion through selling new shares in the year to May 19. Over 45% of the total funds raised were from the secondary listing of China's third largest brokerage by assets Guotai Junan Securities, while the second and third most sizable deals were both spin-offs by state-owned enterprises, namely China Everbright Greentech and BOCOM International.

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