Finance

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.

Investors in the world's biggest IPO since Alibaba better watch out.

Next month, shares in Postal Savings Bank of China, which made its debut in Hong Kong Wednesday, could be plunging. That's because the stock may be able to be shorted as soon as Oct. 27, according to analysts at Bernstein. On Tuesday, the securities closed at HK$4.75 versus a sale price of HK$4.76 in a gray market operated by Phillip Securities Group, so the signs aren't good.

There weren't exactly firecrackers on Postal Savings' first day either. The stock rose 0.21 percent in early trade and ended there at HK$4.77.

Shareholders do have some things to be thankful for.

More than 75 percent of Postal Savings' $7.4 billion IPO was taken up by cornerstone investors, who commit to holding their stock for six months. That provides a sort of floor, and considering most of Postal Savings' cornerstone investors are large state-owned companies, it's unlikely they'd be prepared to stomach too much of a loss once the gates do open.

In addition, bankers for the next few weeks will be in and out of the market stabilizing the shares to prevent excess volatility. Those running the IPO have access to a greenshoe option that allows them to sell investors more securities than originally planned if need be. In Postal Savings' case, that's 15 percent, meaning bankers can add that if demand proves robust or buy up to that amount if it doesn't.

As a company, Postal Savings isn't that bad either. It's got plenty of branches, hence easy access to customers, and unusually for a Chinese bank, decent bad-debt levels.

Not So Bad Debt
Postal Savings' nonperforming loan ratio is well below its peers
Source: Bloomberg Intelligence, Postal Savings Bank IPO prospectus
Note: Industry bad-loan ratio is from the China Banking Regulatory Commission.

But, there's a big but. And it's not the firm's high costs or shadow-banking ties. At its IPO price of HK$4.76, Postal Savings just isn't that cheap.

Being a state firm, the company had to be sold for at least one times book. HK$4.76 equates to 1.03 times trailing price-to-book and 0.97 times forward earnings. Considering Postal Savings' bigger and better-known peers trade below that, the lender would seem a prime target for hedge funds looking for a stock to short. And because of those cornerstone investors, liquidity will be thin.

There's a slim chance investors may even be able to short sell Postal Savings immediately due to its size and expectations it will be a large component of several key indexes.

Investors, you have been warned.

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

  1. Goldman Sachs is the stabilization agent. The bank, along with Bank of America, China International Capital Corp., JPMorgan and Morgan Stanley, was also one of the joint sponsors of the offering. UBS was the sole financial adviser.

  2. Which is expected to end Oct. 20.

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