China's Cinda soars in HK debut as investors see good in bad debt

By Elzio Barreto

HONG KONG (Reuters) - Shares in China Cinda Asset Management Co Ltd surged as much as a third in their trading debut on Thursday, marking a major success for China's first listing of a bad debt management firm and boding well for other potential IPOs in the sector.

Brightening up an otherwise dim IPO market for Hong Kong this year, Cinda has raised $2.5 billion - an amount set to grow to nearly $2.9 billion, with sources familiar with the matter saying the stellar demand virtually guaranteed the exercising of an overallotment option.

Keen to bet that soured loans will be a growth industry in China as the economy slows, 10 cornerstone investors put in a combined $1.1 billion in the IPO, including Oaktree Capital Management Ltd, the world's largest distressed debt investor, and Och-Ziff Capital Management Group LLC.

While Cinda has its critics, some of whom worry about the opaqueness of its bad loan pricing, the presence of such global marquee investors boosted sentiment. The retail portion generated more than 161 times demand than the shares on offer, resulting in that allocation being lifted to 20 percent from 5 percent.

One of four asset management companies that Beijing established in 1999 to absorb toxic assets held by China's four biggest banks, Cinda, which took on the debts of China Construction Bank, is the most profitable.

Peer Huarong Asset Management Corp is next in line to go public and is currently seeking to raise up to $2 billion from pre-IPO investors, ahead of a listing next year, sources have said.

Bad loans at Chinese banks could rise by between 70 billion yuan ($11.5 billion) and 100 billion yuan in 2013 partly due to delinquency risks from industries plagued by overcapacity, according to an annual report by the China Banking Association.

Cinda shares soared as high as HK$4.79, but later pared gains to change hands at HK$4.56 in afternoon trade, up 27 percent from its IPO price of HK$3.58 and valuing the company at around $21 billion.

"I am selling Cinda into the rally and taking some profit," said Alex Wong, Ample Finance's director of asset management.

The offering was the largest in Asia-Pacific excluding Japan since the $3.6 billion listing by People's Insurance Group of China Co Ltd (PICC) in November 2012.

The shares had jumped more than 17 percent in gray market trading on Wednesday, which pointed to a strong start, but Thursday's debut surpassed even the most bullish of estimates from traders.

PROFITS AND DEBTS

Cinda said in its IPO prospectus that profit attributable to equity holders jumped 36 percent in the six months to June to 4.06 billion yuan ($666 million) from a year earlier.

Thursday's jump would raise Cinda's price to book ratio to 1.66 times for 2013, while Hong Kong-listed banks trade at a P/B of 1.2 times, according to Thomson Reuters data.

But the debt manager's borrowing has also risen twenty-fold in the last three years to 161 billion yuan ($26.5 billion) as of end-October as Cinda scooped up distressed assets from the likes of real estate projects, cement makers, miners and coal companies.

"When we manage bad loans we adopt a cautious attitude," Cinda Chairman Hou Jian Hang said at a news conference in Hong Kong, seeking to ease concerns about the debt pile. "We make provisions according to the business needs."

The borrowings expose the company to risk factors including short- and long-term interest rate hikes and also underline how dependent Cinda would be on the Finance Ministry, its biggest shareholder, and other lenders to rollover its borrowings should it need more time to pay back debt.

"In the long run we do have some reservations on the business model," said Tony Chu, a portfolio manager at RS Investments. "It's quite interesting. There's opportunity and also risk."

($1 = 7.7535 Hong Kong dollars) ($1 = 6.0717 Chinese yuan)

(Additional reporting by Denny Thomas, Clement Tan, Nishant Kumar, Venus Wu and Stefanie McIntyre; Editing by Edwina Gibbs)