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Wednesday, September 27, 2006

Bracing For The Largest IPO Ever: Industrial & Commercial Bank of China Ltd.

China's largest bank, the Industrial & Commercial Bank of China Ltd., has shown its planned date for its long-awaited IPO. The price will be determined on October 23 and it should debut for trading on October 27, 2006, assuming there are no major market changes. Its stock will initially only be listed in Hong Kong and Shanghai. This may make it hard for US and European retail investors and many US-only institutions to participate in what appears to be the world's biggest initial public offering ever.

"ICBC" hopes to raise up to an equivalent of $19 billion and if this amount is raised it would break the IPO record of $18.4 Billion raised in the 1998 IPO in Japan's mobile phone operator NTT DoCoMo.

Before any over-allotments over subscriber indications, "ICBC" plans to issue 13 billion A shares priced in Chinese currency in Shanghai and 35.39 billion H shares. The actual price range is not indicated, but that is equal to 14.8% of its share capital. The company has indicated that up to 16.7 percent of total capital could be raised if the subscriptions come in higher than expected. If these numbers are accurate on the base amount, it would put the overall equivalent market cap of "ICBC" at roughly $128 Billion. That number may not be accurate because of share discrepancies, but there is over 1 month yet to figure out the comparative details.

PRIOR CAPITAL RAISED

"ICBC" already plans to sell IPO shares worth $3.5 billion to strategic investors from government investment agencies from Kuwait, Qatar and Singapore. It also received a commitment in June from China's social security fund to invest an equivalent of $2.25 Billion in the bank. Another group of global financial powerhouses including Goldman Sachs, American Express and Allianz AG invested about $3.78 Billion back in January, 2006. That totals over $9.5 Billion raised so far in capital this year alone, and not all of that may be on the prospectus by the actual IPO date. "ICBC" listed assets of 6.5 trillion Yuan ($800 billion) as of the end of 2005.

EXCHANGES AND MARKETS

Hong Kong has its own financial system and mainland regulators treat it as a foreign market even though it is Chinese territory. This does open it up more easily to foreign investors, but most individuals and many smaller institutions in the US do not have access to any foreign accounts other than trading US-listed ADR's and GDR's. It appears as though 3/4 of the funds raised would come from Hong Kong.

COMPARED TO OTHER CHINESE & GLOBAL BANKS:

The country's second-biggest lender, Bank of China (#2), raised $11.2 billion in May, 2006 with an IPO in Hong Kong. China Construction Bank (#3) raised $8 billion in October, 2005. We were supposed to already have the IPO for the Agricultural Bank of China (#4), but its IPO was delayed because it has to get its books in order after its bad loans are higher than any normal banking standards.

China's banks are modernizing as they prepare to meet Beijing's December deadline of opening their market to foreign competitors under its World Trade Organization commitments. Interestingly enough, some ownership and license regulations have been restricted in recent months, so the true degree of "opening up to foreign competitors" may be somewhat overstated. Bank of America recently sold its Hong Kong and Macau retail and commercial operations to China Construction Bank.

If the $128 Billion is accurate, and we stress the IF, here is how it compares to the other large financial institutions with banking operations you know quite well (in market caps): Citigroup (C) $247 Billion; Bank of America (BAC) $242 Billion; J.P.Morgan (JPM) $163 Billion; UBS AG (UBS-ADR) $116 Billion; Mitsubishi UFJ Financial (MTU-ADR) $122 Billion; Banco Bilbao Vizcaya Argentaria (BBV-ADR) $77 Billion; Allianz AG (AZ-ADR) $71 Billion; Lloyds TSB plc (LYG-ADR) $56 Billion; Royal Bank of Canada (RY-ADR) $56 Billion; ABN AMRO NV (ABN-ADR) $55 Billion; Deutsche Bank (DB-ADR) $54 Billion.

You can see that this massive IPO will garner a lot of discussions in global circles, but because of the share listings it is going to be difficult for most US individuals and smaller institutions to participate directly in this IPO.

Jon C. Ogg
September 27, 2006
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