Corporate Finance : Coal Miner, Bank Open China’s Ipo Floodgates

Global Equity/DRs

Chinas biggest coal producer and the countrys fifth-largest lender made initial public offerings in June that set the stage for a flood of Chinese IPOs this year, mainly by state-owned companies.

China Shenhua Energy, which operates 21 mines mainly in western and northern China, raised $2.95 billion in the biggest IPO in the world so far in 2005.

However, fears that coal prices could be peaking kept investors from lining up outside banks in Hong Kong to buy Shenhua Energys shares. The company sold less stock than it was hoping to, and the shares fell 2.7% in their first day of trading, after having been priced near the bottom of the expected range.

Demand was brisk, however, for the $1.88 billion offering of a 13% stake in Bank of Communications, the first of at least three share sales planned by Chinas banks outside the mainland this year. The offering, arranged by HSBC and Goldman Sachs, was priced at the high end of its expected range. The shares rose 13% in their first day of trading on June 23.

London-based HSBC, Europes largest bank by market value, paid $1.75 billion last year for a 19.9% stake in Shanghai-based Bank of Communications, also known as BoCom. HSBC also purchased shares in the IPO to maintain its stake and has an option to double its holding within four years after August 2008, pending regulatory approval.

BoCom, with 2,600 branches in 137 cities across China, has more than 50 million customers.

China Construction Bank, the countrys third-largest lender, plans to raise $5 billion this year. Meanwhile, Bank of America announced in June that it would purchase $2.5 billion of shares in the state-owned bank and another $500 million in the IPO to secure a 9% stake in the bank. The purchase is the largest-ever foreign investment in a Chinese bank.

China Construction Banks chairman, Zhang Enzhao, stepped down in late March and was subsequently detained by police amid allegations of corruption at the bank.

China Minsheng Banking, the countrys first privately owned bank, also is expected to come to market this year, seeking to raise about $800 million.

Chinas banks have reduced their huge backlogs of non-performing loans and are seeking to increase their competitiveness ahead of the entry of foreign banks into the business of dealing with Chinese citizens in yuan late next year.

Meanwhile, China Cosco Holdings, the countrys largest container shipping company, raised $1.22 billion in an IPO on June 30 that fell 10% in its first day of trading. The company is planning to expand its shipping capacity and build new ports.

Shenhua Energys listing on the Hong Kong Stock Exchange on June 15 was the exchanges fifth-largest IPO ever, and the largest since China Life Insurance raised $3.4 billion in December 2003.

The coal companys offering was managed by Deutsche Bank, Merrill Lynch and China International Capital, Chinas largest investment bank, which is headed by Levin Zhu, son of former Premier Zhu Rongji.

Shenhua Energy sold $150 million of its shares to Anglo American, the worlds second-largest mining group. Another $500 million was sold to four Hong Kong-based conglomerates and investment groups.

Originally, Shenhua Energy had planned simultaneous listings in both Shanghai and Hong Kong, but the mainland listing was canceled in light of poor market conditions.

Shenhua Energy earned $1.07 billion in 2004 and expects earnings to rise by 57% to $1.7 billion this year. The companys proved and probable coal reserves of 5.9 billion metric tons are second worldwide, behind those of Peabody Energy of the US. Shenhua owns its own transportation system, including a number of railways and ports.

Gordon Platt