Date: December 7, 2012 Source: China Business News
The program of Industrial Bank (IB) to issue tailored additional shares to five strategic investors including PICC was approved by the Issuance Examination Committee of China Securities Regulatory Commission (CSRC) recently. In the program, IB plans to issue 1.915 billion tailored additional shares to the five investors including the People's Insurance Company (Group) of China Limited, PICC Property and Casualty Company Limited, PICC Life Insurance Company Limited, China National Tobacco Corporation and Shanghai Eightrent ZhengYang Rental Co., Ltd. at the price of RMB 12.36 per share, to raise a total of funds about RMB 24 billion.
After the program was approved by CSRC, the stock price of IB has kept going up. By yesterday, it closed at RMB 13.61, obviously higher than the price of RMB 12.36 agreed originally for the additional shares. For this reason, small- and medium-sized stock investors expressed their doubt about the “diluting” effect of the tailored additional shares again. Nonetheless, the mainstream analysts generally believe that the approval of the program of tailored additional shares means the readily solution to the capital restriction over IB. The timely availability of capital will build the foundation for the business development and profits of the bank in the coming two years. However, what do tailored additional shares mean to IB? China Business News (CBN) had an exclusive interview with Tang Bin, director and board secretary of the bank.
CBN: According to the third quarter report of IB, the net assets per share belonging to the shareholders of the parent company reached RMB 12.78, but in the program of tailored additional shares, the planned price per share is RMB 12.36, which is less than the net assets per share. Is the price for tailored additional shares reasonable or not?
Tang Bin: First, in mentioning the comparison between the price of tailored additional shares and the net assets per share, we believe that the comparison should be based on the price of tailored additional shares and the net assets per share at the time of pricing. It is in this march that IB signed the subscription agreement with investors and set the issuance price. At that time, the net assets per share of IB reached around RMB 11.70, and the PB corresponding to the offering price was about 1.2 times. Therefore, the pricing level is desirable.
Background 1: IB formulated this refinancing program based on the argumentation over the capital gap for the bank's business development in the coming years. Under the circumstance at that time, the capital sufficiency of IB remained at a low level in the banking industry, and it was expected to approach or drop below the regulatory requirement by the year-end. If we didn't supplement our capital, our banking business would lose the power of expansion, and the profit source would also be affected significantly. Hence, refinancing is unavoidable. The discussion on all matters needs to be based on this premise.
Background 2: Before formulating the program of tailored additional shares, IB has weighed various capital supplementing channels based on argumentation. Now, the inner source based financing of IB reached 56% of the total capital, and the proportion reaches 76% plus the 20% accounted by dividends at least. In fact, there is hardly any room for channels to supplement capital depending on increasing the retained profits. Additionally, in the aspect of debt financing, the subordinated debts and hybrid debts issued by IB reach about RMB 27 billion, which also completely hits 25%, the upper regulatory limit for the proportion of debt-related financing in the core capital.
We also took into consideration other capital supplementing schemes as rationed shares, open additional shares, H-share, and convertible bonds. Specifically, both rationed shares and open additional shares require raising funds from all existing shareholders, and against the market in a period of downturn, they would cause significant impacts to the secondary market. Due to the contracted market, the refinancing functions to issue H-share shrink significantly. The convertible bonds require a long period for supplementing capital, and the uncertain transfer period will influence the development of IB. Therefore, it is the most reasonable choice to issue tailored additional shares.
Background 3: the factors of investor behind pricing. A big number of investors expressed their intention for subscription then. Nonetheless, because it is required that tailored additional shares could only be issued to ten investors, namely each shareholder should contribute more than RMB 2 billion. This threshold blocked a number of SMEs with the intention for subscription from offering, and it also resulted in that the price could not be set at a high level. The investors finally chosen were of the background of “state-owned business”, and their investment must go through the relevant procedures of report for approval. This also led to that the model of “offering after the approval of program” in the pricing of additional shares is not possible. Instead, the model of “setting the price while determining the targets” must be employed.
Under such a complicated circumstance, we still insisted on the bottom line of 1.2 PB, truthfully reflecting the evaluation at that time. The offering price of RMB 12.73 before the deduction of dividends is equivalent to 90% of the average price in the 20 trading days prior to the base date for pricing. Certain discount is also the liquidity compensation for the three-year lock-up period, which meets the regulatory requirements. We expected to complete the issuance of tailored additional shares within a period of half year at most and even three months, however, it has been extended to nine months. The net assets per share at the end of the first quarter and the end of the first half year were both higher than the offering price. Yet, in the third quarter, IB achieved good business performance, so the current net assets per share are higher than the offering price set in this March.
CBN: After the program of tailored additional shares passed the examination and approval, small- and medium-sized stock investors worry the most about whether the tailored additional shares will “dilute" the capital stock and “draw blood” from the secondary market, and the ROE at the year-end will also drop consequently.
Tang Bin: Although the issuance of tailored additional shares will influence the denominator for the computation of ROE, it is not the decisive factor.
I have a calculation method for the reference of investors. The tailored additional shares account for 15% of the total capital stock after issuance, but it does not simply mean that the rights and benefits are diluted by 15%. Suppose the increased capital of RMB 24 billion is all used to support the credit extension, the risk assets will increase about RMB 300 billion. Based on annual calculation (at the annual profit margin of risk assets of 2%), the profit source may roughly increase RMB 6 billion. With the profits of RMB 6 billion being divided by the total capital stock of RMB 12.7 billion, the income per share may increase about RMB 0.50.
The funds raised through issuing tailored additional shares should be taken as "running money” put into operation. Thus, it would be self-evident whether tailored additional shares play a “diluting” or “thickening” role.
The remaining question is to discuss the tendency of future ROE. We estimate that it can keep above 20% to the most conservative extent provided that the external macroeconomic situation and regulatory policies keep relatively stable. Based on the current growth, it is estimated that the impact brought about the issuance of tailored additional shares could be cleared up within about half year.
CBN: How long will it be estimated to consume the supplemented capital raised by the issuance of tailored additional shares? What will be brought to IB by the investors of the background of state-owned businesses and financial institutions participating in the issuance of tailored additional shares?
Tang Bin: After the issuance of tailored additional shares, IB will not need to supplement capital from the stock market by the end of 2014.
With five investors becoming shareholders of IB for a lock-up period of at least three years, it showcases the high recognition of external funds to the investment value of our bank. In particular, with PICC, PICC Property and Casualty and PICC Life Insurance becoming the shareholders of IB, it showcases the recognition of the “state-owned business sector” to the long-term investment value of blue chip shares represented by banking shares, establishing a model for value investment.