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IPOS: ALIBABA IN DEMAND, CITIC EYES HK BACKDOOR
MARCH 31, 2014
Citic Group to make HK backdoor listing
Two of this year’s biggest IPOs are both in the headlines, kicking off what’s likely to become a steady flow of news surrounding upcoming listings for e-commerce leader Alibaba and Citic Group, one of China’s oldest and most successful conglomerates. Citic is the more interesting in this latest pair of news bits, since this is the first time we’ve heard about the group’s plans to go public via a backdoor offering through its Hong Kong-listed Citic Pacific (HKEx: 267) unit. Meantime, media are reporting that investment banks are so eager to underwrite Alibaba’s IPO that they’re offering to accept record low fees for their services.
Let’s begin with Citic Group, which has reportedly received regulatory clearance for its backdoor listing plan in Hong Kong. (English article; Chinese article) Under the plan, Citic Pacific would issue new shares to its parent to facilitate the backdoor listing, boosting the company’s market value about 6-fold from its current $6 billion to more than $36 billion.
The group contains numerous units, including Citic Securities (HKEx: 6030; Shanghai: 600030), China’s largest brokerage, private equity investor Citic Capital, and a stake in Citic Bank (Shanghai: 601988). It also owns a number of non-financial units, engaged in everything from steel to grocery stores. It’s unclear what will happen to the other listed units after the group lists, but if the offering is popular I would expect we could eventually see Citic privatize many of these separately traded companies.
From an investor’s perspective, the newly listed Citic Group would clearly be a play into China’s financial services market. The company offers an interesting array of banking, private equity and brokerage services that most listed Chinese companies don’t have. It’s also interesting because Citic is one of China’s more entrepreneurial groups, despite the fact that it’s state-owned.
I personally don’t like any of China’s state-run financial companies as investments, as all take their orders from Beijing and don’t always do what’s best for business. But if I had to pick 1 or 2 companies to buy, Citic Group would probably be near the top of my list, alongside leading bank ICBC (HKEx: 1398; Shanghai: 601398) and perhaps the recently listed bad asset consolidator China Cinda (HKEx: 1359).
Next let’s look at the latest news on Alibaba, which after months of indicating it wanted to list in Hong Kong suddenly shifted gears earlier this month and said it was moving ahead with a New York IPO. (previous post) All of the major investment banks have been jockeying for a piece of the offering, which could raise up to $15 billion, making it the world’s biggest for an Internet company since Facebook’s (Nasdaq: FB) $16 billion listing in 2012.
Now media are reporting the investment banks are so eager to underwrite this deal that they’re willing to accept fees equal to just 1 percent of the offering size — a level also not seen since the Facebook deal. (Chinese article) Normal fee levels are typically in the 3-5 percent range, indicating just how much everyone wants to get a piece of this offering.
At the end of the day, the final amount of money that goes to underwriters and Alibaba is really unimportant. That’s because the banks are chasing this offering for the prestige rather than the money, and Alibaba itself already has so much cash it doesn’t know what to do with it. Still, this offering is clearly shaping up to be the world’s biggest and most highly watched since Facebook in 2012. With any luck, Alibaba won’t suffer the same fate as Facebook, whose IPO ended up getting so overly hyped that the trading debut was marred by technical problems and the stock tanked in its first few months of trading.
Bottom line: Citic Group will become a good diversified China financial play after its backdoor listing in Hong Kong, while banks underwriting Alibaba’s IPO will get record low fees for their services.
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