IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Luzhou Commercial Bank Co Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27817" target="_blank" data-smartkarma-citation="entities:27817:1">Luzhou Commercial Bank Co Ltd (1983 HK)</a> is a Chinese state-controlled city commercial bank. Luzhou Bank has launched a Hong Kong IPO to raise net proceeds between HK$1.6 billion ($208 million) to HK$1.8 billion ($240 million).</p><div class="content-highlight"><p>Our analysis suggests that Luzhou Bank’s fundamentals are mixed as its excellent asset quality is offset by the sharp deceleration in growth in 1H18.</p></div>

Luzhou Commercial Bank Co Ltd (1983 HK) is a Chinese state-controlled city commercial bank. Luzhou Bank has launched a Hong Kong IPO to raise net proceeds between HK$1.6 billion ($208 million) to HK$1.8 billion ($240 million).Our analysis suggests that Luzhou Bank’s fundamentals are mixed as its excellent asset quality is offset by the sharp deceleration in growth in 1H18.

Luzhou Bank IPO Preview: Excellent Asset Quality Dulled by Slowing Growth

<p><a href="https://www.smartkarma.com/entities/27174" target="_blank" data-smartkarma-citation="entities:27174:1">Jiangxi Bank Co Ltd (1916 HK)</a> is a Chinese city commercial bank. At the mid-point of the IPO price range of HK$5.94-6.66 per share, Jiangxi Bank will raise HK$7,152 million ($930 million), resulting in a market cap of $4.8 billion. Cornerstone investors, including state-owned CITIC Group and Chinese online lender Dianrong’s investment affiliate, have agreed to buy 52% of the offer shares at the mid-point of IPO price range. </p><p>At first glance, Jiangxi Bank appears to have superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, a closer examination reveals underlying issues on growth, margins and asset quality:</p><ol><li>Jiangxi Bank’s net profit grew a healthy 74% in 2017. However, Jiangxi Bank's net profit growth was flattered by a 29% decline in the P&amp;L provision charge for impairment losses. Excluding the provision charge, Jiangxi Bank’s operating profit grew a modest 5% in 2017.</li><li>Jiangxi Bank’s net interest margin (NIM) is higher than the average city commercial banks' NIM. However, the difference between Jiangxi’s and the average city commercial banks’ NIM more than halved from 69 basis points in 2016 to 32 basis points in 2017. Strikingly, Jiangxi Bank’s cost-to-income ratio is materially higher than the average city commercial bank and increased from 29.8% in 2016 to 32.2% in 2017.</li><li>The prospectus details that the non-performing loan (NPL) ratio "<em>was lower than the industry average</em>". However, the industry average was based on the overall China banking industry and not on the direct peers - city commercial banks. Since 2015, Jiangxi’s NPL ratio is higher than the average city commercial banks' NPL ratio.</li><li>Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high and increased from 4.8% in 2016 to 5.4% in 2017. In contrast, the average city commercial banks ratio marginally decreased from 2.7% in 2016 to 2.6% in 2017.</li></ol><p>Regarding valuation, based on our estimates at the IPO mid-point price, Jiangxi Bank trades at a significant premium to its peers on a 2019 P/B basis. However, Jiangxi Bank’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Jiangxi Bank lies above the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a premium for the ROE and ROA it delivers. Overall, our view is that Jiangxi Bank is at best fully priced at the proposed IPO price range and recommend investors to seek alternative names to gain exposure to China city commercial banks.</p>

Jiangxi Bank Co Ltd (1916 HK) is a Chinese city commercial bank. At the mid-point of the IPO price range of HK$5.94-6.66 per share, Jiangxi Bank will raise HK$7,152 million ($930 million), resulting in a market cap of $4.8 billion. Cornerstone investors, including state-owned CITIC Group and Chinese online lender Dianrong’s investment affiliate, have agreed to buy 52% of the offer shares at the mid-point of IPO price range. At first glance, Jiangxi Bank appears to have superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, a closer examination reveals underlying issues on growth, margins and asset quality:Jiangxi Bank’s net profit grew a healthy 74% in 2017. However, Jiangxi Bank's net profit growth was flattered by a 29% decline in the P&amp;L provision charge for impairment losses. Excluding the provision charge, Jiangxi Bank’s operating profit grew a modest 5% in 2017.Jiangxi Bank’s net interest margin (NIM) is higher than the average city commercial banks' NIM. However, the difference between Jiangxi’s and the average city commercial banks’ NIM more than halved from 69 basis points in 2016 to 32 basis points in 2017. Strikingly, Jiangxi Bank’s cost-to-income ratio is materially higher than the average city commercial bank and increased from 29.8% in 2016 to 32.2% in 2017.The prospectus details that the non-performing loan (NPL) ratio "was lower than the industry average". However, the industry average was based on the overall China banking industry and not on the direct peers - city commercial banks. Since 2015, Jiangxi’s NPL ratio is higher than the average city commercial banks' NPL ratio.Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high and increased from 4.8% in 2016 to 5.4% in 2017. In contrast, the average city commercial banks ratio marginally decreased from 2.7% in 2016 to 2.6% in 2017.Regarding valuation, based on our estimates at the IPO mid-point price, Jiangxi Bank trades at a significant premium to its peers on a 2019 P/B basis. However, Jiangxi Bank’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Jiangxi Bank lies above the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a premium for the ROE and ROA it delivers. Overall, our view is that Jiangxi Bank is at best fully priced at the proposed IPO price range and recommend investors to seek alternative names to gain exposure to China city commercial banks.

APAC IPOs & Placements

Zhen Zhou, Toh

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p><em>The Smartkarma ECM Team puts out a weekly update on the deals we have covered recently, along with updates for upcoming IPOs.</em></p><div class="content-highlight"><p>Hang Seng Index rallying to record levels continues to sustain the momentum of ECM deal flows week as companies try to take advantage by selling equity at rich valuations. We saw two fairly large placements launched very late in the evening, <a href="https://www.smartkarma.com/entities/5225" target="_blank" data-smartkarma-citation="entities:5225:1">Country Garden Holdings Co (2007 HK)</a> and <a href="https://www.smartkarma.com/entities/14882" target="_blank" data-smartkarma-citation="entities:14882:1">Future Land Development Holdings Ltd (1030 HK)</a>.</p><p>Unfortunately, we had been wrong about momentum being able to support Country Garden's share price in the short term as the company sold about US$2bn worth CBs along with the equity offering which added to selling pressure. Country Garden only managed to recover to close just 0.5% below its deal price. </p><p>However, we did see the momentum Future Land as the share price shot over its last close price <em><strong>before </strong></em>the placement, giving it a good 20.1% return from the deal price. </p><p>For IPOs, this week, <a href="https://www.smartkarma.com/entities/26178" target="_blank" data-smartkarma-citation="entities:26178:1">Zhenro Properties Group Ltd (6158 HK)</a> and <a href="https://www.smartkarma.com/entities/26177" target="_blank" data-smartkarma-citation="entities:26177:1">Bank of Gansu Co Ltd (2139 HK)</a> both had a decent first week. Zhenro, despite doing nothing on the first day of its IPO, managed to climb and close 27% about IPO price. Bank of Gansu closed just 7% above IPO price just like what <a href="https://www.smartkarma.com/profiles/9" target="_blank" data-smartkarma-citation="accounts:9">Ke Yan, CFA, FRM</a> had mentioned in his insight. He drew similarities between Gansu's IPO and <a href="https://www.smartkarma.com/entities/23735" target="_blank" data-smartkarma-citation="entities:23735:1">Jilin Jiutai Rural Comm Bank (6122 HK)</a>'s IPO last year in which the latter also closed about 10% above its IPO price in its first week.</p><p><strong><em>Tentative pipeline IPOs for next week: Huami Tech Part 2 (<a href="https://www.smartkarma.com/profiles/9" target="_blank" data-smartkarma-citation="accounts:9">Ke Yan, CFA, FRM</a> ), Aster DM Healthcare (<a href="https://www.smartkarma.com/profiles/4" target="_blank" data-smartkarma-citation="accounts:4">Sumeet Singh</a> ), China Xinhua Education Early Thoughts (<a href="https://www.smartkarma.com/profiles/673" target="_blank" data-smartkarma-citation="accounts:673">Toh Zhen Zhou</a> )</em></strong></p></div><div><h2>Accuracy Rate:</h2></div><p>Our overall accuracy rate is<strong> 72.8% for IPOs </strong>and <strong>63.7% for Placements.</strong></p><p><em>(Performance measurement criteria is explained at the end of the note)</em></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/042/576/original/Total-Deals-Since-Inception-Accuracy-Rate-Since-Inception-_chartbuilder.png?1516420235" class="editor-image img-responsive" data-smartkarma-image-id="42576"></figure><h2><strong>New IPO filings this week<br><br></strong></h2><ul><li><strong>RITES Limited (India, about US$94m)</strong></li></ul><p>Below is a snippet of our IPO tool on upcoming events for the next week. Our IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool <a href="https://www.smartkarma.com/tools/ipos" target="_blank">here </a>or through the tools menu.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/042/577/original/upcoming.PNG?1516421183" class="editor-image img-responsive" data-smartkarma-image-id="42577"></figure><div class="content-caption">Source: Smartkarma</div><h2><strong>News on Upcoming IPOs<br><br></strong></h2><ul><li><a href="http://www.businesstimes.com.sg/banking-finance/capital-group-eyeing-stake-in-china-biotech-unicorn-sources" target="_blank">Capital Group eyeing stake in China biotech unicorn</a></li><li><a href="https://economictimes.indiatimes.com/markets/ipos/fpos/barbeque-nation-gets-sebis-nod-for-ipo/articleshow/62511462.cms" target="_blank">Barbeque-Nation gets Sebi's nod for IPO</a></li><li><a href="https://www.dealstreetasia.com/stories/chinas-lufax-seeks-60b-valuation-april-hong-kong-ipo-90306/?utm_source=DealStreetAsia%3A+The+Daily+Brief&amp;utm_campaign=9dbb3cc795-RSS_EMAIL_CAMPAIGN+%2A%7CRSSFEED%3ADATE%3A+F+j%2C+Y%7C%2A&amp;utm_medium=email&amp;utm_term=0_0fa50e40c1-9dbb3cc795-239139321&amp;mc_cid=9dbb3cc795&amp;mc_eid=28c8c22a08" target="_blank">China's Lufax seeks $60bn valuation with April IPO in Hong Kong</a></li><li><a href="https://economictimes.indiatimes.com/markets/ipos/fpos/galaxy-surfactants-gets-sebis-go-ahead-to-float-ipo/articleshow/62520977.cms" target="_blank">Galaxy Surfactants gets Sebi's go-ahead to float IPO</a></li><li><a href="http://vietnamnews.vn/economy/421358/pv-power-to-sell-shares-in-ipo.html#6JyZiaowATDsxvYT.97" target="_blank">PV Power to sell shares in IPO</a></li><li><a href="https://www.dealstreetasia.com/stories/softbank-ping-an-1bn-healthcare-unit-ipo-90610/?utm_source=DealStreetAsia%3A+The+Daily+Brief&amp;utm_campaign=ffc133f650-RSS_EMAIL_CAMPAIGN+%2A%7CRSSFEED%3ADATE%3A+F+j%2C+Y%7C%2A&amp;utm_medium=email&amp;utm_term=0_0fa50e40c1-ffc133f650-239139321&amp;mc_cid=ffc133f650&amp;mc_eid=28c8c22a08" target="_blank">SoftBank leads $1b funding in Ping An healthcare unit ahead of Hong Kong IPO</a></li></ul><h2><strong>Smartkarma Community's Analyses on Upcoming IPOs<br><br></strong></h2><ul><li><a href="https://www.smartkarma.com/insights/huami-ipo-preview-an-unprofitable-company-masquerading-as-a-profitable-one" target="_blank" data-smartkarma-citation="insights:16936">Huami IPO Preview: An Unprofitable Company Masquerading as a Profitable One</a></li><li><a href="https://www.smartkarma.com/insights/bandhan-bank-ipo-preview-poor-people-rich-returns" target="_blank" data-smartkarma-citation="insights:16810">Bandhan Bank IPO Preview: Poor People, Rich Returns</a></li><li><a href="https://www.smartkarma.com/insights/sk-lubricants-ipo-preview-part-1-a-solid-business-weighed-down-by-long-term-pressures-from-evs" target="_blank" data-smartkarma-citation="insights:16626">SK Lubricants IPO Preview (Part 1) - A Solid Business Weighed Down by Long-Term Pressures from EVs</a></li><li><a href="https://www.smartkarma.com/insights/newgen-software-issues-not-to-be-overlooked" target="_blank" data-smartkarma-citation="insights:16807">Newgen Software: Issues Not To Be Overlooked</a></li></ul><h2>List of pre-IPO Coverage on Smartkarma</h2><table class="table table-striped"><tbody><tr><td>Name</td><td>Insight</td></tr><tr><td colspan="2"><strong>Hong Kong</strong></td></tr><tr><td>Cenmintang</td><td><a href="https://www.smartkarma.com/insights/cenmintang-ipo-preview-a-beverage-and-snack-play-whose-growth-is-hard-to-grasp" target="_blank" data-smartkarma-citation="insights:9282">Cenmintang IPO Preview: A Beverage and Snack Play Whose Growth Is Hard to Grasp</a></td></tr><tr><td>China Feihe</td><td><a href="https://www.smartkarma.com/insights/china-feihe-ipo-preview-goat-bless-infant-formula-milk" target="_blank" data-smartkarma-citation="insights:12751">China Feihe IPO Preview: Goat Bless Infant Formula Milk?</a></td></tr><tr><td>Bank of Jiujiang</td><td><a href="https://www.smartkarma.com/insights/scraping-the-bottom-of-the-barrel-bank-of-jiujiang" target="_blank">Scraping the Bottom of the Barrel: Bank of JiuJiang</a></td></tr><tr><td colspan="2"><strong>South Korea</strong></td></tr><tr><td>Bodyfriend</td><td><a href="https://www.smartkarma.com/insights/bodyfriend-ipo-preview-part-i-goodbye-osim-hello-bodyfriend" target="_blank">Bodyfriend IPO Preview: Part I (Goodbye Osim, Hello Bodyfriend) Bodyfriend) </a></td></tr><tr><td>CJ OliveNetworks</td><td><a href="https://www.smartkarma.com/insights/cj-olivenetworks-on-a-fast-track-to-an-ipo-in-2017" target="_blank">CJ OliveNetworks - On A Fast Track to an IPO in 2017? </a></td></tr><tr><td>Cafe24</td><td><a href="https://www.smartkarma.com/insights/cafe-24-ipo-preview-part-1-korea-s-shopify-leading-contender-for-tesla-requirements-based-ipo" target="_blank" data-smartkarma-citation="insights:13665">Cafe 24 IPO Preview (Part 1): Korea’s Shopify - Leading Contender For “Tesla” Requirements Based IPO</a></td></tr><tr><td>Data Solution</td><td><a href="https://www.smartkarma.com/insights/datasolution-ipo-summary-questions-remain-on-growth-but-market-seems-excited" target="_blank" data-smartkarma-citation="insights:12519">Datasolution IPO Summary - Questions Remain on Growth, but Market Seems Excited</a></td></tr><tr><td>Gentle Monster</td><td><a href="https://www.smartkarma.com/insights/gentle-monster-ipo-a-monster-growth" target="_blank" data-smartkarma-citation="insights:8630">Gentle Monster IPO - A Monster Growth</a></td></tr><tr><td>Korea Exchange</td><td><a href="https://www.smartkarma.com/insights/korea-exchange-ipo-question-is-when-not-if" target="_blank">Korea Exchange IPO - Question Is When, Not If</a></td></tr><tr><td>Outin Futures</td><td><a href="https://www.smartkarma.com/insights/outin-futures-corp-ipo-preview-part-1" target="_blank" data-smartkarma-citation="insights:11212">Outin Futures Corp IPO Preview (Part 1)</a>,  <a href="https://www.smartkarma.com/insights/outin-futures-corp-ipo-valuations-part-2" target="_blank" data-smartkarma-citation="insights:11736">Valuations (Part 2)</a></td></tr><tr><td>Woowa Bro</td><td><a href="https://www.smartkarma.com/insights/woowa-brothers-corp-ipo-preview-part-1-the-most-popular-food-delivery-service-in-korea" target="_blank" data-smartkarma-citation="insights:11104">Woowa Brothers Corp IPO Preview (Part 1) - The Most Popular Food Delivery Service in Korea</a></td></tr><tr><td>V-One Tech</td><td><a href="https://www.smartkarma.com/insights/v-one-tech-ipo-summary-another-oled-stock-ipo" target="_blank" data-smartkarma-citation="insights:11689">V-One Tech IPO Summary - Another OLED Stock IPO</a>,  <a href="https://www.smartkarma.com/insights/v-one-tech-ipo-part-2-ipo-bookbuilding-results" target="_blank" data-smartkarma-citation="insights:11806">IPO Bookbuilding Results</a></td></tr><tr><td>Zinus</td><td><a href="https://www.smartkarma.com/insights/zinus-ipo-preview-part-1-an-amazing-comeback-story-1-mattress-brand-on-amazon" target="_blank" data-smartkarma-citation="insights:13698">Zinus IPO Preview (Part 1) - An Amazing Comeback Story (#1 Mattress Brand on Amazon)</a></td></tr><tr><td colspan="2"><strong>India</strong></td></tr><tr><td>NSE</td><td><a href="https://www.smartkarma.com/insights/national-stock-exchange-pre-ipo-review-bigger-better-stronger-but-a-little-too-fast-for-some" target="_blank">National Stock Exchange Pre-IPO Review - Bigger, Better, Stronger but a Little Too Fast for Some</a></td></tr><tr><td>NSE</td><td><a href="https://www.smartkarma.com/insights/nse-ipo-preview-not-only-fast-its-risky-and-expensive" target="_blank">NSE IPO Preview- Not Only Fast..its Risky and Expensive</a></td></tr></tbody></table>

The Smartkarma ECM Team puts out a weekly update on the deals we have covered recently, along with updates for upcoming IPOs.Hang Seng Index rallying to record levels continues to sustain the momentum of ECM deal flows week as companies try to take advantage by selling equity at rich valuations. We saw two fairly large placements launched very late in the evening, Country Garden Holdings Co (2007 HK) and Future Land Development Holdings Ltd (1030 HK).Unfortunately, we had been wrong about momentum being able to support Country Garden's share price in the short term as the company sold about US$2bn worth CBs along with the equity offering which added to selling pressure. Country Garden only managed to recover to close just 0.5% below its deal price. However, we did see the momentum Future Land as the share price shot over its last close price before the placement, giving it a good 20.1% return from the deal price. For IPOs, this week, Zhenro Properties Group Ltd (6158 HK) and Bank of Gansu Co Ltd (2139 HK) both had a decent first week. Zhenro, despite doing nothing on the first day of its IPO, managed to climb and close 27% about IPO price. Bank of Gansu closed just 7% above IPO price just like what Ke Yan, CFA, FRM had mentioned in his insight. He drew similarities between Gansu's IPO and Jilin Jiutai Rural Comm Bank (6122 HK)'s IPO last year in which the latter also closed about 10% above its IPO price in its first week.Tentative pipeline IPOs for next week: Huami Tech Part 2 (Ke Yan, CFA, FRM ), Aster DM Healthcare (Sumeet Singh ), China Xinhua Education Early Thoughts (Toh Zhen Zhou )Accuracy Rate:Our overall accuracy rate is 72.8% for IPOs and 63.7% for Placements.(Performance measurement criteria is explained at the end of the note)New IPO filings this week  RITES Limited (India, about US$94m)Below is a snippet of our IPO tool on upcoming events for the next week. Our IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.Source: SmartkarmaNews on Upcoming IPOs  Capital Group eyeing stake in China biotech unicornBarbeque-Nation gets Sebi's nod for IPOChina's Lufax seeks $60bn valuation with April IPO in Hong KongGalaxy Surfactants gets Sebi's go-ahead to float IPOPV Power to sell shares in IPOSoftBank leads $1b funding in Ping An healthcare unit ahead of Hong Kong IPOSmartkarma Community's Analyses on Upcoming IPOs  Huami IPO Preview: An Unprofitable Company Masquerading as a Profitable OneBandhan Bank IPO Preview: Poor People, Rich ReturnsSK Lubricants IPO Preview (Part 1) - A Solid Business Weighed Down by Long-Term Pressures from EVsNewgen Software: Issues Not To Be OverlookedList of pre-IPO Coverage on SmartkarmaNameInsightHong KongCenmintangCenmintang IPO Preview: A Beverage and Snack Play Whose Growth Is Hard to GraspChina FeiheChina Feihe IPO Preview: Goat Bless Infant Formula Milk?Bank of JiujiangScraping the Bottom of the Barrel: Bank of JiuJiangSouth KoreaBodyfriendBodyfriend IPO Preview: Part I (Goodbye Osim, Hello Bodyfriend) Bodyfriend) CJ OliveNetworksCJ OliveNetworks - On A Fast Track to an IPO in 2017? Cafe24Cafe 24 IPO Preview (Part 1): Korea’s Shopify - Leading Contender For “Tesla” Requirements Based IPOData SolutionDatasolution IPO Summary - Questions Remain on Growth, but Market Seems ExcitedGentle MonsterGentle Monster IPO - A Monster GrowthKorea ExchangeKorea Exchange IPO - Question Is When, Not IfOutin FuturesOutin Futures Corp IPO Preview (Part 1),  Valuations (Part 2)Woowa BroWoowa Brothers Corp IPO Preview (Part 1) - The Most Popular Food Delivery Service in KoreaV-One TechV-One Tech IPO Summary - Another OLED Stock IPO,  IPO Bookbuilding ResultsZinusZinus IPO Preview (Part 1) - An Amazing Comeback Story (#1 Mattress Brand on Amazon)IndiaNSENational Stock Exchange Pre-IPO Review - Bigger, Better, Stronger but a Little Too Fast for SomeNSENSE IPO Preview- Not Only Fast..its Risky and Expensive

Smartkarma: ECM Coverage Weekly Update (20 January 2018)

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

<p>Bank of Gansu, a city commercial bank headquartered in Gansu province in China, is seeking to raise up to USD 900m to list in Hong Kong. Fellow insight provider <a href="https://www.smartkarma.com/profiles/1680" target="_blank" data-smartkarma-citation="accounts:1680">Arun George</a> wrote a comprehensive note in his insight <a href="https://www.smartkarma.com/insights/bank-of-gansu-ipo-preview-superior-profitability-inferior-asset-quality" target="_blank">here</a>. In this insight, I will compare Bank of Gansu's operating metrics with its city commercial bank peers and look at the company's growth drivers. While we are concerned about sustainability of Bank of Gansu's rapid growth and superior metrics in the recent periods, we note the interesting similarity between Bank of Gansu's listing and that of Jilin Jiutai Rural Commercial Bank listing from a year ago, and of the view that participating in this IPO is speculative. </p>

Bank of Gansu, a city commercial bank headquartered in Gansu province in China, is seeking to raise up to USD 900m to list in Hong Kong. Fellow insight provider Arun George wrote a comprehensive note in his insight here. In this insight, I will compare Bank of Gansu's operating metrics with its city commercial bank peers and look at the company's growth drivers. While we are concerned about sustainability of Bank of Gansu's rapid growth and superior metrics in the recent periods, we note the interesting similarity between Bank of Gansu's listing and that of Jilin Jiutai Rural Commercial Bank listing from a year ago, and of the view that participating in this IPO is speculative. 

Bank of Gansu IPO: Superior Metrics but Sustainability in Question

<p>Bank of Gansu is listing in Hong Kong with trading expected to commence on 18 January. At the mid-point of the IPO price range, HK$2.61-2.77 per share, Bank of Gansu will raise net proceeds of HK$5.7 billion ($729 million), resulting in a market cap of HK$26.2 billion ($3.3 billion). Four cornerstone investors have agreed to invest $400 million in the IPO. A <a href="https://www.globalcapital.com/article/b169rvjpq4ty46/gansu-bank-covers-%24784m-hk-listing" target="_blank">recent press report</a> suggests that the books are already covered at the top of the range. </p><p>Bank of Gansu has superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, this is tempered by asset quality indicators which are worse than its peer group. Our view is that the IPO is attractive at the mid-point of the price range due to: </p><ol><li>While the average city commercial banks' net profit growth declined from 14% in 2016 to 9% in H117, Bank of Gansu’s net profit growth substantially increased from 48% in 2016 to 185% in H117. Remarkably the net profit growth was not due to a spiralling increase in interest-bearing assets. Bank of Gansu has superior profitability due to its high net interest margin (NIM) and low cost-to-income ratio. </li><li>However, since 2015, Bank of Gansu’s non-performing loan (NPL) ratio is higher than the average city commercial banks NPL ratio. Notably, two lead indicators for future NPLs paint a worrying picture. Firstly, Bank of Gansu’s special mention loan ratio increased markedly from 2.0% in 2016 to 3.1% in H117 vs average city commercial banks ratio decreased from 2.7% in 2016 to 2.4% in H117. Secondly, Bank of Gansu’s overdue 90+ days loan ratio also increased from 1.7% in 2016 to 2.1% in H117 vs the average city commercial banks ratio remained relatively stable from 2016 to H117.</li><li>Based on our estimates at the IPO mid-point price, Bank of Gansu trades at a significant 47% premium to its peers on a 2018 P/B basis. However, Bank of Gansu’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Bank of Gansu lies at the linear trend line for P/B vs ROE, i.e. trades at a fair value for the ROE it delivers. </li></ol>

Bank of Gansu is listing in Hong Kong with trading expected to commence on 18 January. At the mid-point of the IPO price range, HK$2.61-2.77 per share, Bank of Gansu will raise net proceeds of HK$5.7 billion ($729 million), resulting in a market cap of HK$26.2 billion ($3.3 billion). Four cornerstone investors have agreed to invest $400 million in the IPO. A recent press report suggests that the books are already covered at the top of the range. Bank of Gansu has superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, this is tempered by asset quality indicators which are worse than its peer group. Our view is that the IPO is attractive at the mid-point of the price range due to: While the average city commercial banks' net profit growth declined from 14% in 2016 to 9% in H117, Bank of Gansu’s net profit growth substantially increased from 48% in 2016 to 185% in H117. Remarkably the net profit growth was not due to a spiralling increase in interest-bearing assets. Bank of Gansu has superior profitability due to its high net interest margin (NIM) and low cost-to-income ratio. However, since 2015, Bank of Gansu’s non-performing loan (NPL) ratio is higher than the average city commercial banks NPL ratio. Notably, two lead indicators for future NPLs paint a worrying picture. Firstly, Bank of Gansu’s special mention loan ratio increased markedly from 2.0% in 2016 to 3.1% in H117 vs average city commercial banks ratio decreased from 2.7% in 2016 to 2.4% in H117. Secondly, Bank of Gansu’s overdue 90+ days loan ratio also increased from 1.7% in 2016 to 2.1% in H117 vs the average city commercial banks ratio remained relatively stable from 2016 to H117.Based on our estimates at the IPO mid-point price, Bank of Gansu trades at a significant 47% premium to its peers on a 2018 P/B basis. However, Bank of Gansu’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Bank of Gansu lies at the linear trend line for P/B vs ROE, i.e. trades at a fair value for the ROE it delivers. 

Bank of Gansu IPO Preview: Superior Profitability, Inferior Asset Quality

China

Bank of Gansu Co., Ltd. provides banking services. The Company offers deposits, loans, bonds, insurance, investment banking, time deposit, and debit and credit cards. Bank of Gansu provides its services throughout Gansu.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00