Sat, Jul 20, 2002 page10

• Bank of China IPO attracts interest

  TICKET TO RIDE Despite its NPL figures, investors are flocking to buy shares in the state-run bank's Hong Kong unit for access into one of the last great market-frontiers

  • BLOOMBERG
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  The third-largest sale of new stock to the public this year is a Chinese bank that has more than double the proportion of bad loans its peers do and was investigated for money-laundering at a predecessor last year.

  Investors lined up to buy.

  The US$2.8-billion initial public offering of the state-run Bank of China's (中國銀行) Hong Kong unit, whose shares will be priced tomorrow, has attracted investors from Li Ka-shing (李嘉誠), Asia's richest man, to Hong Kong retirees and civil servants. At a time when dozens of share sales have been withdrawn this year, investors signed up for four times more shares than are available.

  The lure: a bank whose parent has 100 million depositors and 13,000 branches in a home market. China, with 1.3 billion people and an economic growth rate of 8 percent, is opening its markets after joining the WTO. Investors say those reasons are as important -- or more important -- than the bank.

  "Imagine you were overnight given access to the world's largest market, filled with people who get richer daily," said Henry Lee, managing director of Hendale Asia Fund Ltd, an alternative investment fund. "People are buying into China."

  The sale's arrangers promoted the first-time share sale with meetings in such cities as Hong Kong, New York, Boston, London, Milan and Frankfurt. In Japan, the sale also was pitched with full-page newspaper advertisements.

  The global portion of the deal drew at least five times more orders in Asia than in Europe and the US, a banker involved in the transaction said.

  "It's a restructuring story and if you like those kinds of stories, then that's great," said Edward Allinson, manager of the US$50 million Dreyfus Founders International Fund in Boston. "I have enough of those. I don't need to buy into another one."

  Asian companies, many of which are customers of the Hong Kong unit's parent and plan to expand in China as it opens to foreign competition, ordered billions of dollars of stock.

  Standard Chartered Plc, a UK bank whose business is mostly in Asia, agreed to buy US$50 million in shares, sale documents said.

  Hutchison Whampoa Ltd (和計黃浦) and Cheung Kong Holdings Ltd (長江實業), both owned by billionaire Li, as well as Sun Hung Kai Properties Ltd (新鴻基地產) and others that have borrowed from the banking group, said they'd buy.

  Shanghai Industrial Holdings Ltd's (上海實業控股) spokesman Derek Fung said the company plans to buy some BOC shares partly because "it's our leading principal banker," adding that the investment is expected to provide a "decent return."

  Fund managers, for their part, are willing to buy only at the lower end of the range, marketed at HK$6.93 to HK$9.50. Twelve Asia-based investors, who manage more than US$14 billion and plan to buy shares, said they would pay an average of HK$7.87 a share.

  BOC Hong Kong, formed in October by the merger of the Hong Kong and Macau businesses of Bank of China, had a non-performing loan ratio of about 9 percent at the end of last year. That's almost twice the 4.7 percent average for Hong Kong banks.

  The economy barely grew last year; the bank's write-offs for loans increased to HK$1.2 billion (US$153 million) in 2001 from HK$322 million in 1999. Cleaning up bad loans caused the Hong Kong unit's 2001 net income to fall 47 percent. It shifted HK$11.4 billion of loans into a special purpose vehicle, BOC Cayman.

  In January, Bank of China paid a fine of US$20 million to regulators in China and the US for making preferential loans, issuing fraudulent letters of credit and other infractions of US and Chinese rules.

  In 2001, the bank discovered that three managers at the Kaiping sub-branch had embezzled about US$500 million over the previous eight years, according to the sale prospectus.

  "There are big problems with all the Chinese banks," said Scott McGlashan, who helps manages US$150 million for Jade Absolute Fund Managers in the UK. "Investors are deceiving themselves if they believe the Hong Kong units of these banks will not be affected."
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