China EverBright Bank (Stock Code: 6818.hk): Unattractive IPO

China EverBright Bank (CEB) has been ready to issue its H-shares in Hong Kong on December 20, 2013. Its H-share IPO (initial public offering) price range is between HKD$3.83 (lower price ceiling) to HKD$4.27 (upper price ceiling).

China EverBright Bank (CEB) did try to list its H-shares in Hong Kong for two times already before in 2011 and 2012, but all previous IPOs were postponed due to poor market conditions. If successful for this third IPO attempt, EverBright Bank will raise up to HKD$21.7 billion and become the largest IPO this year in Hong Kong, surpassing China Cinda IPO just listed on Hong Kong Stock Exchange last week.

China EverBright Bank (CEB), which is stated-controlled and headquartered in PRC (People's Republic of China) Beijing, has 3 major business areas on retail banking, corporate banking and treasury operations. The bank already listed its A-shares in Shanghai with stock code 601818.sh since August 2010 and its H-shares stock code will be 6818.hk. After its H-shares IPO listing, Central Huijin Investment Ltd. (CHI) will still hold around 45% of the company shares and will remain the controlling shareholder of the bank. China EverBright Ltd (CEL Stock Code: 165.hk), which is in the same group of EverBright Bank, also will hold around 3.8% of its total shares after H-share IPO.

H-share IPO joint global coordinators are CICC (China International Capital Corporation H.K. Securities), Morgan Stanley Asia, UBS AG (H.K. Branch) and China EverBright Securities International.

Dividend policy of EverBright Bank:
According to PRC laws, EverBright Bank may only pay dividends out of its distributable profits. In addition, according to Administrative Measures of Accrual Provisions For Financial Institutions (AMAP) proposed by MoF (Ministry of Finance) since mid-2012, the bank needs to set aside a provisional reserve not less than 1.5% of the balance within its gross risk-bearing assets.

Key Risk factors for EverBright Bank are:
(1) EverBright Bank may not be able to maintain its quality of loan portfolio or asset values, and guarantees or collaterals securing its loans may be also insufficient;
(2) There are mismatches between maturity dates of its assets and debts;
(3) There are credit risks or liquidity risks of the business, especially if the bank cannot get enough deposits from customers;
(4) The bank may fail to meet regulatory requirements about capital adequacy ratio (CAR) in the future.

Why we, Mr China, think that this EverBright Bank IPO (Stock Code: 6818.hk) is unattractive?

Based on our initial analysis, there are real concerns about its insufficient capital adequacy ratio and growing bad loans.

By end-September 2013, EverBright bank had a core Tier 1 capital adequacy ratio (TCAR) of 7.89% and a capital adequacy ratio (CAR) of 9.65%. These ratios are almost the lowest level for its Chinese counterparts and are far below the average values (9.87% TCAR and 12.18% CAR) of Chinese listed banks.

That is why net proceeds for this H-share IPO will have to be used for lifting its relatively-low core capital adequacy ratio (CAR) and core Tier 1 capital adequacy ratio (TCAR).

In addition, according to CBRC (China Banking Regulatory Commission) data, EverBright Bank has its total bad loans risen for an eighth straight quarter in a row, to RMB 563.6 billion. And the trend is still up.

So we, Mr China, do not recommend a buy for China EverBright Bank (CEB Stock Code: 6818.hk) IPO because there are obviously better choices available in the market already. Based on this conclusion, we think it is not too meaningful to show our target share price, expected earnings per share and price-to-earnings ratio (P/E) for EverBright Bank in this blog. If you are interested in the methodology of our target share price calculations, you may search our other IPO stock analysis reports that we published in this blog before.


Remark:
Cornerstone investors of EverBright Bank (Stock Code: 6818.hk) H-share IPO are: Ocean Fortune Investment (OFI) from China Shipping Group, Ever Ideal (EI) from Chinese Estate Holdings (CEH Stock Code: 127.hk), Prudential Insurance (PI) of America, Sun Life Insurance (SLI) of Canada, Zhongrong International Trust (ZIT) from Jingwei Textile Machinery (JTM Stock Code: 350.hk), TEDA Investment Holding from Chinese stated-owned TEDA (Tianjin Economic-Technological Development Area) Group, Wenza International Investment (WII) of Hong Kong, China Oceanwide International Investment (COII) from China Oceanwide Holdings, Sinochem International Pte (Overseas) from Singapore-incorporated SIC (Sinochem International Corporation), Shanghai Electric Group (SEG) of Hong Kong, Sany International Investment (SII) from Sany Heavy Industry (SHI Stock Code: 600031.sh), NorthShore Investment (NI) H.K. from China Qing Hua Energy Group, Guangdong Fortune Field Gold Trade (a Shanghai Gold Exchange member), China Chengtong Holdings from State Council SASAC (State-owned Assets Supervision and Administration Commission), Sun Hung Kai Strategic Capital Ltd (SHKSCL) from Sun Hung Kai Financial H.K. Ltd (SHK Stock Code: 86.hk), First Asian Holdings from United Asia Finance H.K., H.K. Energy Group Investment, Haochen Holding of Hong Kong, C.N. Team etc. EverBright Bank (Stock Code: 6818.hk) IPO Prospectus Source: HKSE - Hong Kong Stock Exchange (Stock Code 388.hk).