Bank of China 'unlikely to sustain price'


The Bank of China is due to start trading on Thursday and has expanded the portion it will sell to retail investors

By Alex Frew McMillan

HONG KONG, China (CNN) -- The Bank of China Hong Kong has priced its shares at HK$8.50 ($1.09) for institutional investors, at the high end of its proposed range.

But it will not be able to sustain that valuation, according to one fund manager.

"We came up with a number that we were prepared to pay," the manager, who works for a prominent investment house, told CNN on Monday.

"For us 8.50 will be the wrong number, and I expect that will be true for many of the institutions," he added.

Despite the recent downturn in global equities, the Bank of China offering has drawn heavy interest in Hong Kong and should raise about $2.5 billion. The shares are due to list on the Hong Kong stock exchange on Thursday (full story).

Asked what the bank is worth, the fund manager said it was significantly less than $HK8.50 a share.

"Let's just say it [our bid] begin with a 7 and not an 8," he said.

Interested if the price falls

The fund manager said he would not be interested in purchasing the stock after it starts trading unless the price falls.


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"We wouldn't chase it at these levels," he explained. The fund manager did not want to be identified because he did not want to appear to be knocking the sale.

With institutional interest low, the bank also said it will free up more stock for retail, or ordinary, investors than initially expected.

A total of 385,000 Hong Kong investors have applied for the offering. Each applicant will get at least 500 shares, Chairman Liu Jinbao stated.

Retail investors getting a discount

They will be permitted to buy in at a discount, getting the shares at HK$8.075.

The new allocation plan means 35 percent of the offering will go to retail investors, up from the 10 percent initially allocated that way.

The rest of the stock float will go to local companies in Hong Kong and to institutional investors such as fund managers.

The Bank of China International, its investment-bank arm, is underwriting the bank's own offering, with Goldman Sachs and UBS Warburg.

The Bank of China Hong Kong is expected to lead the way for the rest of China's "Big Four" banks to seek to sell stock to the public. The bank is Hong Kong's second-largest, after HSBC. Its parent is headquartered in Beijing.

'Risk premium' too great for some

But the "risk premium" is too great for some. In June the bank reported its 2001 profit dropped 47 percent.

"Hang Seng Bank (a subsidiary of HSBC) looks more attractive," the fund manger told CNN. "I'd probably be more keen to own something like that."

Other managers believe the price may hold up.

"They can get away with it," Stewart Aldcroft, managing director of Investec Asset Management, told the Wall Street Journal. "With the support of local businesspeople, they were able to sell the whole of the institutional bit fairly easily."

Some managers forced to buy

Managers who oversee Hong Kong stock funds will also likely to have to buy the stock, because it is expected to join the Hang Seng index.


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But some regional fund managers expect it to underperform, and can turn to alternatives such as Hang Seng or even a non-Chinese bank such as South Korea's Kookmin Bank.

It is hardly the most auspicious market timing for an initial public offering (Asian stocks plunge).

Asian markets have been buffeted by the collapse of WorldCom, which became the biggest bankruptcy in U.S. history late on Sunday (full story).

But Liu is unfazed.

"We are very pleased with the high level of support from local retail investors, as well as from institutional investors in Hong Kong and overseas," Liu said in a press release.

"This demonstrates investors' confidence in the future growth and prospects of BOC Hong Kong," he added. "We are confident of a bright future in our new era as a publicly listed company."