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Asia ECM: Cinda exits shadows with IPO

Five global coordinators named on deal; Investors look for detail on company activities

As China Cinda Asset Management Company gears up for an initial public offering that might raise $2.5 billion, pertinent and pointed questions are being asked.

First, what precisely is Cinda? Is it still, as it was on its creation in 1999, a motley composite of substandard non-performing loans siphoned out of a pre-restructured China Construction Bank (CCB), the nation’s second-largest lender? Or is it, as the company itself now claims, a bad-bank-made-good, fast becoming a full-service financial services provider?

We will know soon enough. Cinda’s Hong Kong listing is one of the most highly anticipated of the year. Underwriters are circling: the five joint global coordinators firmed up, when Euromoney went to press, were Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and Morgan Stanley, and finally UBS, which along with Standard Chartered and Citic Capital invested Rmb5.37 billion ($850 million) in Cinda in March 2012. UBS is the most likely to win the coveted left lead role on the deal, bankers close to it said.

Timing is harder to ascertain, though sources close to Cinda say that with long-only funds rushing to be part of the deal, the AMC is likely to make its market debut in the second week of December.

Gordon Chang, author of The coming collapse of China
Gordon Chang, author of The coming collapse of China

Either way, few expect the sale to be anything but a resounding success. Fund managers in Hong Kong are nothing if not ebullient about its prospects. "Beijing really wants [it] to succeed, therefore it will, therefore we’ll buy [shares]," says one. Even notorious China hawks believe the deal will fly. "It will be a success for sure, [China’s leaders] can’t afford for it to fail, so it will succeed," says Gordon Chang, author of The coming collapse of China. "[China’s leaders] can’t afford for it to fail, so it will succeed." Notes a Hong Kong fund manager: "If you’re negative on China, this is what you should buy."

What happens after the listing is done and dusted is another matter. Some of the darker corners of a hitherto opaque sector will, for the first time, be exposed to public scrutiny. What hides amid the shadows will intrigue many.

Many who have seen inside Cinda are impressed. "I’ll invest in it, unless there is something I see that particularly disturbs me, and from all that I’ve seen, it’s a perfectly viable financial vehicle," says a Beijing-based bad-loan investor and asset manager.

But questions abound. Is Cinda good at disposing of bad loans? How solid are its financials? What is a fair book value for a company that has no listed peers? And what precisely is its long-term strategy, beyond simply buying, restructuring and flogging non-performing assets?

The asset management company’s internal brokerage, Cinda International Securities, reckons that between 2010 and 2012 Cinda made an average annual return of over 110% when disposing of bad debt. A high proportion of these gains were made through securitizations and by swapping loans for equity stakes in leading state-owned enterprises.

Nor do earnings appear to be a problem. According to its latest full-year financials, Cinda posted net profit of Rmb7.2 billion in 2012, an annualized increase of 6%. Goldman Sachs tips that figure to grow by 19% in 2013, to Rmb8.7 billion, with earnings increasing by an average of 26.5% over each of the next two years. Three pre-IPO reports issued by Goldman, JPMorgan and BOC International value Cinda at between $16 billion and $21.5 billion, or between 1.1 and 1.4 times its 2014 book.

Under water

Assessing its post-IPO strategy is far harder. Like Huarong, Orient and Great Wall, the other three asset management companies founded in 1999, Cinda continues to suck in bad loans from Beijing-run lenders. Of the Rmb1.4 trillion in soured assets absorbed by the four on their inception, most is believed to remain under water.

"We know their legacy portfolio isn’t making any money," notes Christine Kuo, a senior credit officer, financial institutions, at Moody’s Investors Service in Hong Kong. Over the next five years a further Rmb1.6 trillion in soured loans was siphoned into the asset management companies by leading state lenders.

Cinda’s pre-IPO restructuring has not been smooth sailing. The asset manager has been forced to raise capital several times. Beijing injected Rmb15 billion into it in 2010 when it became a joint stock company. In December 2012, nine months after the UBS-led investment, Cinda launched its inaugural dim sum bond, raising Rmb2 billion.

The company’s long-term ambitions are far more nebulous. Cinda’s chiefs have long harboured ambitions of creating a big full-service financial company. They have succeeded in their aim, up to a point. The asset manager now boasts a real estate division, runs its own trust company, and offers insurance, financial leasing and broking, operating in 30 cities across the People’s Republic.

Yet despite this plethora of divisions, bad loans still reign supreme: Moody’s Kuo reckons that Cinda’s NPL arm still accounts for up to 70% of all revenues, while the asset manager values the accumulated book value of its non-performing assets at Rmb1.3 trillion. For now though, all eyes are on Cinda’s impending market debut. The first of China’s four bad banks is about to go public. We’re about to find out what really lurks beneath.

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