Bank of China’s IPO

Summary

Following in the footsteps of Bank of Communications (BoCom) and China Construction Bank (CCB), Bank of China’s (BOC) IPO application was approved by the Hong Kong Stock Exchange on April 27, 2006. BOC was expected to raise US$8 billion IPO, which translates to a share price that is 1.85 to 2.23 times its 2006 book value. In comparison, both CCB and BoCom’s share prices currently stand at 3 times its book value. Since CCB and BoCom have gained 50% and 100% in returns, respectively, for investors in the past year, there is no doubt that BOC’s IPO will be well received.  

Analysis

China’s state-owned banks have continued their pace of external financing through IPO in Hong Kong since 2005. These Chinese banks went through the process of restructuring non-performing loans, injecting capital from government, reorganizing their corporate structure, attracting global strategic investors, and improving their corporate governance over the past few years. This strategy coupled with its willingness to allow a foreign listing seems to be paying off for China’s state-owned banks. Now global investors not only embrace these state-owned banks but consider them to be a core holding in their portfolios, viewing them as a must hold. Even if BOC’s share price reaches the highest expectations of investors (roughly 2.3 times its 2006 book value) during its IPO offering, it remains below three times the book value of its peers, CCB and BoCom. I predict this IPO will be substantially oversubscribed.