BoCom’s stunning debut raises red flag

  • Business
  • Wednesday, 16 May 2007

SHANGHAI: Shares in China's fifth largest bank, Bank of Communications, surged a stronger-than-expected 80% on their Shanghai debut yesterday, indicating that investor fervour in China's stock market, especially for newly issued shares, may have gone too far, analysts said. 

BoCom's A shares opened at 14.20 yuan against a 7.90 yuan offer price and were trading at 14.11 yuan at midday. Analysts had expected a debut at about 12 yuan. 

BoCom, 18.6% owned by HSBC Holdings Plc, raised 25.2 billion yuan (US$3.3bil) last month in China's fourth biggest domestic public offering, which attracted a record 1.455 trillion yuan in subscriptions. 

The midday price left BoCom's A shares at a 66% premium to the HK$8.64 price of the bank's Hong Kong-listed H shares and higher than premiums for other top dual-listed Chinese banks. 

A man walks past a Bank of Communications branch in Hefei, eastern China's Anhuiprovince. — Reuters

It also gave HSBC a paper gain of at least US$12.53bil on the 7.775 billion BoCom shares it bought for US$1.75bil in mid-2004. HSBC also bought 1.34 billion BoCom H shares in 2005. 

Industrial and Commercial Bank of China's A shares were at a 33% premium to the H shares at midday and Bank of China's had a 52% premium. 

“BoCom's debut makes its A share price now 23 years ahead of its earnings, with valuation apparently excessive,” said banking industry analyst She Minhua of China Securities. 

“In the past several months, new listings have always outperformed experts' forecast debut prices, indicating investors may have become overly optimistic about stock investment gains,” She said. 

Analysts expect BoCom's earnings to rise at a steady 25% to 30% a year over the next 23 years, lifted by China's rapid economic growth. 

But its midday price valued it at 41.5 times analysts' estimated 2007 earnings of 0.34 yuan a share, well above an average 34 times for 11 Chinese banks listed on the Shanghai, Shenzhen and Hong Kong exchanges, and 37 times for China Merchants Bank's A shares, which had the highest forecast P/E prior to BoCom's debut, according to Reuters Estimates. 

BoCom chairman Jiang Chaoliang said the surge in the shares exceeded his expectations, but he played down concerns over China's banking share valuations. 

“In the long-term perspective, I think the valuations of banking shares on the domestic market are still reasonable,” Jiang said on the sidelines of a ceremony to mark the listing. 

BoCom's spectacular domestic debut closely followed China CITIC Bank Corp, the country's No. 7 lender whose A shares almost doubled on their Shanghai debut on April 27, compared with a 14% rise in its H shares listed simultaneously in Hong Kong. 

The benchmark Shanghai stock index has repeatedly hit record highs, including an all-time intra-day record on Monday, although it had dropped 1.1% by midday yesterday after having risen more than 50% since the start of 2007. – Reuters  

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