CCB is Speeding up Preparations for the IPO in the Hong Kong Market

CCB is speeding up preparations for the IPO and a series of listing application documents are under preparation. The banks’ negotiations with a number of potential strategic investors have entered into the critical stage. With the approval of the Chinese government, CCB will submit the prospectus and other documents to the securities exchange and the regulatory authorities. Up to now the prospectus held by the directors of the bank has been revised for many times.

The IPO market also gets increasingly clear. Different from the old version that CCB will launch the IPO in Hong Kong and London or New York simultaneously, the bank will first get listed in the Hong Kong market and then consider issuing A shares in the Chinese mainland. Listing in other overseas markets will also be considered.

“Under the guidance of related government agencies and with the support of CCB shareholders, we are trying to get listed in Hong Kong by the end of this year according to our schedule,” said Fan Yifei, Assistant to the CCB President confidently.

In the management of CCB, Fan is in charge of the shareholding reform and the introduction of strategic investors and recently has been appointed as the bank’s spokesman. On May 26, at the interval of intensive negotiations with strategic investors, Fan received exclusive interview of the reporter on the latest development of CCB’s shareholding reform.

According to Fan, CCB is holding substantive talks with a number of potential strategic investors and the details will be disclosed at appropriate time.

CCB had signed the confidential agreement with all the negotiating strategic investors and no single party shall disclose the name of the negotiating party or details of the negotiation, otherwise it might suffer serious legal consequences, explained Fan. Earlier some foreign media reported that certain foreign bank held strategic negotiation with a Chinese bank, leading to the abnormal fluctuation of the banks’ market capitalization and losses which should have been avoided. Therefore, during the contact with strategic investors all parties concerned must strictly follow the information disclosure procedure.

CCB hopes to introduce 1 to 3 strategic investors through negotiations. Since the negotiations have yet not completed the specific equity structure still requires consultations.

“With too few shares the strategic investors might not take CCB as an important partner, which will not be helpful to improve the bank’s corporate governance. Therefore we hope the strategic investors hold appropriate proportion of shares. However, the proportion should not be too high either. The regulatory authorities have rules governing the equity structure, i.e. the share proportion of any single foreign shareholder should be less than 20% and prior to the IPO that of all the foreign shareholders together should be less than 25%,” said Fan Yifei.

Fan noted that the CCB adheres to the following principles when choosing the strategic partners: first, the investor must be strong enough, otherwise it might be unable to meet the capital appetite of CCB; second, it must have expertise and be the industry leader and is willing to transfer technologies to and share the managerial experience with CCB; third, in case of a foreign partner it shall have no conflict of interest with CCB. Those large multinational financial institutions whose development strategies in the Chinese market constitute conflict of interest with CCB will not be considered. CCB also hopes to see the earliest possible involvement of the strategic investors so that they can kick off cooperation as soon as possible.

Since July last year when CCB started the introduction of strategic investors, the number of negotiating parties has been changing constantly, with some leaving the negotiation table while others coming. Especially after Guo Shuoqing took the position of the bank’s chairman, the number of potential strategic investors has increased. Those investors who are negotiating with CCB also show growing interest in the bank.

A senior executive from a foreign institution participating in the strategic investor negotiations with CCB once told the bank that he had never imaged the overall performance of CCB is so good. By the end of 2004 the bank’s non-performing loan rate was only 3.92%, capital adequacy ratio was 11.29% and part indexes reached the standards of leading international commercial banks.

What also falls out of the imagination of the potential strategic investors is that the investment process is so difficult and the workload far exceeds what has been expected. However, the foreign institutions are not frustrated at all; instead some of them even have conducted follow-up researches on investing in Chinese state-owned commercial banks as early as several years ago. To them making investment in China and CCB is the result of careful considerations. Fan told the reporter that several days ago their negotiation with a certain potential strategic investor even lasted three days and nights and covers very detailed items. Currently CCB is making choice from those potential investors to see which can bring about most benefits to the bank.

Hit the core of the shareholding reform

CCB plans to leave a number of positions to the strategic investors including the department managers and senior executives of financial management or launch overseas recruitment. “If one day you see any foreigner with high nose and blue eyes in the BOD or management of CCB, you should not feel surprised at all,” said Fan.

Compared with the global recruitment campaign of the Bank of China, the recruitment of CCB appears to keep a low profile. It is known that very soon several returned overseas Chinese or foreigners will join the management of the bank. In fact, as early as in 1998 CCB has started recruiting talents from abroad and at peak a dozen of its department managers are returned overseas Chinese. One of them is Mr. Zhang Long who has worked as the General Manager of the Credit Approval Department and the Internal Institutional Reform Promotion Office for 6 years and plays a major role in the management and reform of the bank. Currently the bank’s Risk Department, Technology Department and Real Estate Financial Department are all headed by returned overseas Chinese. Dr. Sun Di, the senior consultant of the Reorganization Office, was once the lifetime professor of the CAL STATE University.

While speeding up preparations for the IPO, CCB is reforming its internal structure to hit the core of the shareholding reform. To enable the shareholders’ meeting, Board of Directors (BOD) and Board of Supervisors (BOS) to better fulfill their functions, CCB has set up the special BOD and BOS offices. It also establishes three sub-branches under the Department of Risk Management: non-individual credit risk management office, individual credit risk management office and market and operational risk management office. A risk director is appointed for each branch to take charge of the risk control and should report to the Headquarters. The bank adopts the vertical management of auditing throughout the bank and has enhanced the separation and balance and check with the front office. It establishes the Enterprise Customer Relations Department to offer marketing services to large cross-province customers and the VIP Customer Department in addition to the Personal Banking Service Department to provide customer-tailored products and services. Meanwhile, CCB has restructured the party and administrative departments and clearly defined the rights and responsibilities of the Party Committee, shareholder’s meeting, BOD, BOS and the management.

“All the reform efforts aim at one goal, and that is CCB can provide better financial services for our customers after the shareholding reform,” said Fan Yifei. He added that if in the planning economy CCB relied on the Chinese government, in the future the bank will depend on its customers for survival and growth.

Taking the recent headlines of some media that CCB Shenzhen branch will charge management fee on small accounts as an example, Fan explained the background against which CCB took those measures. Calculating at the permanent residents of Shenzhen, on average each resident has about 7.6 bank accounts, which is attributed to complicated reasons including the reason of the bank itself. To charge small accounts stimulates the customers to consolidate their accounts, which not only helps the wealth managements of customers but also raise the service efficiency and quality of the bank. All those reform measures aim at offering the customers better services. In the process of reform CCB is committed to protecting the interest of customers. The Shenzhen branch decides not to charge any fee on five categories of accounts closely linked with the livelihood of the people and other pilot regions will expand the free-charge to low-income households and college and university students. Fan stressed that CCB sincerely welcomes the customers and all sectors of the society including the media to supervise its services.

Clarifying the phased listing strategy

As the shareholding reform moves ahead, where to get listed is put on the agenda.

At present CCB is thinking about the strategy of getting listed in Hong Kong first and then in the Chinese A share market, but the final timetable and IPO market must be approved by related government agencies and the regulatory authorities, according to Fan. He added that as a high quality company, CCB will surely consider repaying the investors of domestic A share market. If the domestic capital market offers adequate room for such a large-cap stock as CCB, the bank will return to the mainland capital market at appropriate time after its IPO in Hong Kong. Before or after getting listed in the domestic market CCB will also consider listing in other overseas markets.

When transferring or issuing shares pricing is undoubtedly a fairly sensitive question to both transaction parties. It is said that the shares transferred to the strategic investors and the IPO will be priced on the basis of net asset value per share plus appropriate premium. Since up to now it is difficult to estimate the final issue price, the specific fund-raising volume is yet to be finalized. Fan made a rough estimate: “now we can only say that CCB’s IPO might raise dozens of billions US dollars.”

Intermediary organizations are preparing for the IPO

Not only CCB itself but also the intermediary organizations invited by the bank are making final preparations for its IPO.

Employed by CCB as its auditor, KPMG sets up a strong team to audit the bank’s financial statements as of 2002, 2003 and 2004 drafted according to international standards and its financial statement as of the end of 2004 formulated in accordance with Chinese accounting principles.

As an important IPO document, CCB’s prospectus has been revised by each of its director. The bank invited CICC and Morgan Stanley Dean Witter Asia Limited to serve as its financial consultants. Since CCB is the first state-owned Chinese bank to be listed in overseas market, it is extremely careful when drafting the prospectus, even word by word.

As the appraiser of CCB’s reorganization, China Consultants of Accounting and Financial Management Co., Ltd. (CCAFM) submitted the asset appraisal report on August 30 last year to the Ministry of Finance for approval. As the land appraiser, Zhong Di Real Estate Evaluation Co., Ltd. presented the land evaluation report to the Ministry of Land and Resources for approval. Chesterton Petty Limited has conducted the property assessment for CCB and CCB invited the Commerce & Finance Law Offices, the Herbert Smith law firm and the Skadden law firm to offer legal services. The intermediary organizations are drafting the documents for the IPO of CCB.

“It is difficult for outsiders to imagine how many documents the IPO requires and how heavy the workload is,” said Fan Yifei who in the past served in a foreign investment bank, “there are lots of uncertainties in the process of listing. We must always keep vigilant since the international capital market changes so rapidly.”

He said that the staffs of CCB involved in the IPO have long ago forgotten weekend and every day work extremely hard for the listing. He also stressed that in the process of listing quality has overriding importance over time and each link of the listing process should leave no room for regret.