Investors may be giving a cold shoulder to many new Chinese companies lining up to list overseas, but one name that's not having any such troubles is Citic Group, one of China's oldest and most entrepreneurial financial services conglomerates. Ironically, Citic isn't even making a formal IPO as it seeks to list in Hong Kong, but instead is making a massive back-door offering using its Citic Pacific (OTCPK:CTPCY, HKEx: 267) unit as the vehicle. The latest reports say a group of top-tier global and domestic investors are lining up to buy into the new back-door listing, reflecting Citic's attraction as an alternative for buyers looking to gain exposure to China's financial services sector.
Citic Pacific will probably become even more attractive as China's banks and brokerages come under mounting pressure due to the nation's slowing economy. The banks are already gearing up for a massive bad-debt crisis, and have recently announced plans to sell tens of billions of dollars worth of new shares to bolster their capital bases. Meantime, the brokerages are struggling to find business in a broken domestic stock market that is showing no signs of improvement anytime soon.
Against that backdrop, it should come as no surprise that the list of major investors who have committed to buy shares in Citic's back-door listing includes the likes of insurance giant AIA (HKEx: 1299), Singaporean sovereign wealth fund Temasek, and Japan's Mizuho Bank (English article). The group of major foreign investors have committed a total of $5.1 billion towards the $37 billion that Citic Pacific will need under a back-door listing transformation that will see it purchase most of its parent company's assets.
The investment group also includes several major domestic Chinese buyers, led by the nation's social security fund, which is providing $2.2 billion. Citic first announced the backdoor listing plan in April, in a move that would make its many different assets available to investors under a single company to be called Citic Ltd. Citic Pacific shares have rallied nearly 30 percent since the plan was first rumored, as the market gets excited about this new investment opportunity.
The new company will have a wide range of assets, but the most attractive ones will be its core financial services that are more commercially-oriented than many of China's traditional state run banks and brokerages. Those assets will include Citic Securities (OTCPK:CIIHY, HKEx: 6030; Shanghai: 600030), China's largest brokerage, as well as Citic Bank (OTCPK:CHCJY, HKEx: 988; Shanghai: 601988). They would also presumably include Citic Capital, the group's main private equity arm that is emerging as a major player both at home and abroad.
The rise of Citic Pacific contrasts with traditional Chinese banks, which are struggling under mountains of bad loans made at Beijing's request during the nation's massive economic stimulus program in 2009 and 2010. Agricultural Bank of China (OTCPK:ACGBY, HKEx: 1288; Shanghai: 601288) announced a plan last week to raise nearly $13 billion to boost its capital (previous post), and Bank of China (HKEx: 3988; Shanghai: 601398) has followed this week with a similar plan to raise $16 billion. Both banks will raise their money through the issue of preferred shares.
Amid all that fund-raising, China's traditional major banks hardly look like an attractive investment option right now. Brokerages don't look too exciting either, since they are being hurt by weakness that has made China's domestic stock markets some of the world's worst performers over the last 2 years. I personally like alternative financial services investments like private equity firm Fosun International (OTCPK:FOSUY, HKEx: 656) and bad asset manager Cinda (HKEx: 1359), which both are more commercially driven than most Chinese lenders. The new Citic Ltd. could also fit that description, making it a strong choice for both the big institutions and retail investors looking for exposure to China's financial services market.
Bottom line: Citic's addition of major global investors to its Hong Kong backdoor listing reaffirms its attractiveness as a strong alternative for exposure to China's financial services market.
Disclosure: No positions
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