To say that there is a bit of skepticism about China Cinda Asset Management (Cinda) which begins trading on the Hong Kong Stock Exchange this week, would be an understatement. It may actually be the most debated IPO in Hong Kong ever, as highlighted by the title of a recent blog by a fellow Forbes Contributor: Is This the Worst IPO Ever?
Investors have good reason to question the motivation behind those who sought to list the company. Cinda is one of the four "bad banks" established in 1999 to buy non-performing loans (NPLs) from state-owned banks ahead of their public listings in the 2000s.
Acting under instruction from the government, it acquired the loans at par value, which was undoubtedly a bad deal for Cinda. Possibly the biggest worry of investors is that it will again be forced to buy NPLs at unreasonable prices after it raises new funds. In its prospectus, Cinda said that it plans to use 60% of the proceeds of the IPO to purchase distressed assets.
Of particular concern is whether the Cinda IPO is part of a grand scheme by the government to clean up local government debt. There is a worry that Cinda and the other three "bad banks" will be forced to buy loans extended to local government financing platforms (LGFPs) in 2009 and 2010 as a result of the 4 trillion yuan stimulus package, many of which are believed to be non-performing.
The reality is that the biggest negatives overshadowing the company are not new to China, while others are overstated. It is for this reason that investors are lining up around the block to get involved. The company raised US$2.5 billion after pricing its IPO at the top of the range at 3.58 Hong Kong dollars due to the move than $65 billion in orders it received.
Here are a few reasons why these investors will not be disappointed.
1. Cinda is unlikely to be forced to clean up local government debt.
As it stands today, the government does not appear ready to deal with existing local government debt. The major regulatory measures that have been released, including caps on local government debt by the China Banking Regulatory Commission and changes to include debt levels as part of local government officials' assessment standards, focus more on preventing the accumulation of new debt rather than deal with existing. Meanwhile, the fact that the new nationwide survey of local debt has not been released (although planned for Oct/Nov) shows that no national plan has been agreed.
The Chinese government always takes a 'problem solving' approach, which means that the debt is only likely to be dealt with gradually, rather than in a large-scale hive-off. In terms of how it will be done, the emerging plan seems to be to force local-government funded asset management companies (AMCs) to perform this function, rather than Cinda and the other AMCs, aka "bad banks".
2. The real estate market is unlikely to collapse any time soon.
Probably the biggest risk to Cinda's business is its exposure to real estate. Of its distressed assets counted as receivables, which account for 93% of its total distressed assets, 60.4% come from real estate and another 4.5% from construction. This is owing to the fact that fixed assets account for the vast majority of collateral in China. As a result, any major changes in property prices or sector regulation could have an adverse impact on the company.
However, groundbreaking changes in the real estate sector are unlikely in the next few years. While the recently concluded Third Plenum touched upon almost every sector, property regulation was notably absent. Owing to disagreements between the central government and local governments regarding the implementation of a property tax (central wants it, locals don't), new regulation is slow to be rolled out.
Meanwhile, the fact that stable growth was outlined by top leaders as a condition for further reform means that policymakers are unlikely to allow any significant slowdown in the real estate sector, which is the most important sector to the Chinese economy.
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