China's Latest 'Bad Bank' Deposits Little Value

ENLARGE

It’s not much of an initial public offering when the public isn’t much involved.

Such is the case with “bad bank” China Huarong Asset Management, the latest debt cleanup vehicle to market itself to international investors with a Hong Kong IPO. Of the $ 2.2 to $ 2.9 billion slated to be raised, two-thirds has already been taken up by so called cornerstone investors—most of whom are Chinese state-controlled or state-reliant companies.

Huarong, set up by Beijing in the late 1990s as one of the four asset management companies to take on toxic loans from China’s banks, is being presented as a market-oriented enterprise. Its business is to buy up bad loans at a discount and work out the assets, before selling them off for a profit. It also has other financial businesses, such as brokerage and fund-management arms.

The headquarters of China Huarong Asset Management Co., Ltd. in Beijing, pictured in 2012. ENLARGE
The headquarters of China Huarong Asset Management Co., Ltd. in Beijing, pictured in 2012. Photo: Imaginechina/Zuma Press

But the market doesn’t like these types of businesses these days. Its direct competitor, China Cinda Asset Management, 1359 1.28 % floated to much fanfare in December 2013, yet the stock has languished, trading 11% below its IPO price.

Cinda’s business model has proven less countercyclical than promised. These bad banks were meant to benefit as China cleans up its mountain of bad debts. But most of their own funding comes from the very banks from whom they buy bad debt, creating a circularity that spooks investors.

There is also the deep skepticism about Beijing’s financial policy-making that has developed since this year’s fumbled stock-market bailout and currency policy change.

So when it came time to make Huarong a public company, China’s Ministry of Finance, Huarong’s owner, turned to other state-owned enterprises to scoop up the bulk of Huarong’s newly issued shares.

Sino-Ocean Land, a big state-controlled property developer, is buying $ 684 million. State Grid, a utility operator, will take $ 300 million. CGN Investment, a subsidiary of CGN Power, a nuclear operator that had its IPO less than a year ago, will take $ 50 million.

One of the cornerstones, China Oceanwide International, may not even be buying all its shares with its own money, instead borrowing up to $ 60 million from Citigroup to do so.

All that support has enabled Huarong’s shares to be valued at around 1.05 times book value, above Cinda’s 0.94 times. Better return on equity may justify the premium, but banklike entities that trade at such dismal multiples reflect a lack of confidence in the value of the assets they hold. Cinda itself, with much state support at its IPO, was valued at 1.3 times book at the time.

With no major foreign money buying into the IPO early, it is a signal for other investors to steer clear.

Write to Alex Frangos at alex.frangos@wsj.com


WSJ.com: Markets

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