Caixin
Nov 28, 2017 07:17 PM
FINANCE

Shandong Trust Set to Break IPO Drought

In its second attempt, Shandong International Trust Co. has secured approval from the Hong Kong stock exchange to launch an IPO, likely raising up to HK$351 million. Shares will begin trading on Dec. 8. Photo: Visual China
In its second attempt, Shandong International Trust Co. has secured approval from the Hong Kong stock exchange to launch an IPO, likely raising up to HK$351 million. Shares will begin trading on Dec. 8. Photo: Visual China

Shandong International Trust Co. Ltd. (SITC), is set to become the first Chinese trust company to go public in more than two decades after the government clamped down on their activities in the wake of the 1999 bankruptcy of Guangdong International Trust and Investment Corp.

After a failed attempt to list on the Hong Kong stock exchange earlier this year, SITC, which is owned by the Shandong provincial government, is hoping it will be lucky the second time around after filing a prospectus for an initial public offering (IPO) on Tuesday. If it succeeds, SITC will become the first Chinese trust company to list in Hong Kong.

Net proceeds of the IPO could be as much as HK$3.57 billion ($460 million) if the stock is sold at the top of the indicative price range of HK$4.46 to HK$5.43 per share and the underwriters sell extra shares due to strong demand.

Around 45% of the shares offered in the IPO are being bought by five cornerstone investors. Three of them – Jinan Finance Holding Group, Shandong Development & Investment Holding Group and Shandong Guohui Investment Co. – are owned by various government entities in Shandong province. The other two are the asset management arms of two big Chinese commercial banks – Industrial and Commercial Bank of China and China Merchants Bank.

SITC’s main business is offering financial and wealth management products and services in China, arranging loans and other fundraising activities mostly for companies, and setting up and managing trusts. It also invests its own money, taking stakes in other financial institutions or buying financial products such as shares, mutual funds and wealth management products.

Overseas expansion plans

The proceeds of the IPO will be used to expand the company’s activities in real estate investment and wealth management, and to buy equity interests in financial institutions at home and abroad, the company said. Chairman Wang Yingli said the company chose Hong Kong because it has ambitions to expand overseas and the city is the best launchpad into the global market.

Yet SITC’s planned expansion comes at a time when the industry is facing widespread cleanup and tightened regulation amid calls by President Xi Jinping for financial risks to be controlled and curtailed to safeguard the country’s financial security.

In the latest phase of the government’s campaign to control financial risks, the People’s Bank of China (PBOC) and other regulatory bodies published draft rules on Nov. 17 to bring the $15 trillion asset management industry to heel. They cover products issued by banks, trust companies, insurance companies, securities firms, funds and futures brokerages.

Reflecting the industry’s expansion and the impact of the curbs, SITC’s prospectus shows its trust assets under management (AUM) more than doubled from 211.4 billion yuan at the end of 2011 to 254.6 billion yuan at the end of 2016, a compound annual growth rate of 17.8%. But in the first five months of 2017, AUM showed a marginal decline.

SITC, which was set up in 1987, is ranked 25th out of 68 trust companies in terms of asset size, according to its prospectus. The total value of assets managed by the 68 trust companies was 21.98 trillion yuan at the end of the first quarter of 2017, up 32.48% year-on-year, according to figures from the China Trustee Association. Of the 68 trust companies, only Anxin Trust Co. Ltd. and Shaanxi International Trust Co. Ltd. are listed in China, and they came to the market back in 1994.

China’s state-owned trust and investment companies have a checkered history. They expanded rapidly in the 1990s as the economy opened up and local governments searched for ways to raise money. But the boom ended ignominiously in 1998 when Guangdong Trust and Investment Co., known as Gitic, ran into financial difficulties. The trust was eventually pushed into bankruptcy in early 1999 by then-Premier Zhu Rongji, with debts of around $4.4 billion, at the time the biggest bankruptcy in China’s history, leaving investors and creditors nursing heavy losses.

Several lean years followed when trust activities were severely curtailed. But trust companies started to make a comeback after the global financial crisis in 2008 when the government encouraged a lending boom to cushion the economy from the fallout. Since then, trust companies – including those owned by local governments – have boomed and have played a major role in the growth of the shadow banking industry, including the explosion in asset management and wealth management products.

Growing risks

But the latest crackdown could have a negative impact on the outlook for SITC’s main businesses, a risk highlighted in its prospectus. The company also warned that it has “significant” exposure to industries that could be affected by a downturn in the economy, such as the real estate sector and government infrastructure projects, which could increase risks that clients won’t be able to meet their financial obligations and that the company will earn less commission as deals decline.

The company also provides debt financing to local government financing vehicles, which have become increasingly risky amid orders from the Ministry of Finance to local governments not to guarantee their borrowings.

SITC said its net profit attributable to shareholders fell to 833 million yuan in 2016 from 1.08 billion yuan in 2015, although its earnings in the first five months of 2017 rose 41% year-on-year to 400 million yuan.

Shandong Lucion Investment Holdings, which is owned by the provincial government, currently controls 63.02% of SITC, but its holding will fall to 47.1% after the IPO, according to the listing documents. CNPC Asset Management, an arm of China National Petroleum Corporation, will see its stake fall to 18.8% from 25%, and Shandong High-Tech Venture Capital, which is owned by Shandong Lucion, will see its shareholding drop to 4.83% from 6.25%.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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