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.

The world's largest IPO since Alibaba's record New York listing in late 2014 isn't going cheap. That doesn't matter, because Postal Savings Bank of China, which is seeking as much as $8.1 billion in a Hong Kong initial public offering later this month, has state backing that will provide a convenient floor for its share price.

In other words, don't expect a rerun of Japan Post, which went public in a three-pronged share sale last November. After jumping 15 percent on day one, stock in Japan Post Bank is now down 33 percent from its December peak.

Dead Letter
Japan Post Bank shares have lagged the broader market since listing
Source: Bloomberg

Compared with the Tokyo whale, Postal Savings has a better growth story. For one thing, it can actually lend, unlike Japan Post, which is primarily a savings bank with steadily falling returns because of its unhappy investment in Japanese government bonds.

Even so, you'd be hard-pressed to call it a bargain.

As a state firm, Postal Savings must sell new stock for at least once book value. The price range of HK$4.68 ($0.60) to HK$5.18 per share translates to about 1.01 to 1.11 times, based on March end financials, above the average for China's large lenders.

Postal Savings also doesn't have a lot of bad debt, and has room to grow. According to Bernstein, its 39 percent loan-to-deposit ratio is well below the more than 70 percent average of its peers. However, as Gadfly has noted, the company is inordinately exposed to wealth-management products, plus it has relatively weak capital buffers, high costs and a heightened vulnerability to fraud.

But less-than-stellar fundamentals don't especially matter. Cornerstone investors, who commit to holding their shares for six months, have agreed to buy about $5.86 billion of stock, accounting for 76 percent of Postal Savings' offering at the midpoint of the marketed range. That puts it just below the record for cornerstone tranches, currently held by China Development Bank Financial Leasing whose $799 million IPO in July went 79 percent to stayers.

Postal Savings' cornerstone investors include China Shipbuilding, with a commitment of about $2.2 billion, Shanghai Port, with $2.1 billion, and HNA Group, the owner of Hainan Airlines and aircraft lessor Avolon, with about $1 billion. They'll hardly be sellers if the stock falls. A pre-IPO sale also saw strategic investors including tech giant Tencent enter the fray.

Big Float
Companies from Asia, in particular China, dominate the biggest-ever IPOs
Source: Bloomberg

Which is to say that in reality, Postal Savings' $8.1 billion IPO is much smaller -- more like $2.24 billion. It's not even the biggest this year. That prize goes to Danish utility Dong Energy and its $2.6 billion IPO in June.

This is one package investors can be pretty sure will deliver.

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

  1. According to Bernstein, by FY2016 Japanese government bonds will account for 56 percent of Japan Post's investment portfolio and contribute 71 percent of its net income in the period.

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

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net