Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

At a time of global market turmoil and high risk aversion, the support of heavyweight investors for an initial public offering should count as a positive. Don't bet on that for China Development Bank Financial Leasing, which is seeking to raise as much as $978 million in Hong Kong.

The aircraft and infrastructure lessor has sold more than two-thirds of its IPO to so-called cornerstone investors, big shareholders that agree to hold the stock for a set period in exchange for early and guaranteed allocations. Such agreements typically signal confidence in a company's prospects, encouraging smaller shareholders to join the party. In this case, it may have the opposite effect, underscoring challenges that make this offer a hard sell for the investing public.

CDB Leasing, an arm of China's biggest policy lender, is coming to market amid a share sale drought. Hong Kong has hosted only three IPOs  this year of more than $500 million and all are trading below their offer prices, according to data compiled by Bloomberg. They include rival lessor BOC Aviation, which raised $1.1 billion in May and has since dropped more than 6 percent.

Shenzhen-based CDB Leasing is offering 3.1 billion new shares at HK$1.90 (24 cents) to HK$2.45 apiece, valuing the company at 0.9 times to 1.1 times its estimated book value for 2016. U.S.-listed AerCap, the world's largest publicly traded lessor, trades at 0.89 times book.

Therein lies the challenge: As a state-owned company, CDB Leasing is prohibited from selling shares for less than its net asset value. Meanwhile, BOC Aviation's sale and subsequent price performance have effectively capped the upper limit at about 1.1 times book. There are ways around the Chinese government restrictions, for example by using the historical rather than forecast asset values, but even with this wiggle room, CDB Leasing's offer may not be cheap enough. 

With tepid demand from public investors no doubt anticipated, CDB Leasing has turned to friendly faces. The company may sell a record 79 percent of its float to cornerstone buyers, with the largest chunk going to state-owned power company China Three Gorges Corp. 

There are other reasons why CDB Leasing may deserve a lower rating. Unlike BOC Aviation, the company isn't just an aircraft or shipping lessor. It leases infrastructure for local governments and in 2012 began taking on small- to medium-sized enterprises as customers. That has taken the company into the overcapacity-plagued steel and coal industries, categorized under "other" equipment in its accounts, according to KGI analyst Andy Leung.

Smokestack Drag
CDB Leasing made a pretax loss from businesses including coal and steel equipment in 2015
Source: CDB Leasing Prospectus
Footnote: Ship and commercial leasing businesses include leasing construction machinery. Other leasing business includes equipment for industries such as coal, steel and electronics.

That's been a drag on profitability. While BOC Aviation's return on assets has been broadly stable over the past three years, CDB Leasing's has fallen.

Shrinking Profitability
CDB Leasing's return on assets has been falling while that of its rival BOC Aviation has stayed constant
Sources: KGI Asia, BOC Aviation, CDB Leasing prospectus

Lessors such as CDB, BOC Aviation and a forthcoming offer by a unit of Minsheng Bank offer exposure to China's finance industry without the specter of nonperforming loans that bedevil the banking sector. A leasing company that fails to receive customer payments can always take back the asset and hire it to someone else. And in a capital-intensive business, the liquidity and funding backstop of a bank should be a plus.

CDB Leasing's foray into China's debt-heavy smokestack industries can only detract from those advantages. Small investors are probably right to steer clear.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Admittedly, China Aircraft Leasing trades at more than 2 times book in Hong Kong after a 2014 IPO, but that is a much smaller company. 

     

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net