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IPO of AgBank : Sign of a Chinese Bubble?

The recent IPO of AgBank has raised more money than any other IPO to date. . Despite the strong bearish feeling in the market, and the growing Euro crisis which has created ripples worldwide, this initial public offer by AgBank, which is also the 3rd biggest bank in China raised a significant amount of capital. China’s economy has been steadily growing, and the confidence in the Chinese economy can be evidenced by this recent IPO.

AgBank is China’s biggest institution. The bank was founded five decades ago in 1951 by Mao Zedong. It is surprising to know that just a few years ago was declared insolvent as it had a whooping twenty-four per cent of loans that were non performing. The bank’s turnaround after it was bailed out with the help of $30 billion dollars has been dramatic. But this is no surprise as China’s banking and finance sectors in particular have been booming lately (although, it remains to be seen whether a bubble is building).

Though the IPO still has strong headwinds and a bearish market against it, its debut on July 15 is expected to raise a substantial amount of capital for the bank. This is because of strong investor demand. Reuters has reported from a source that is directly familiar with the listing details, that the issue has been oversubscribed over twenty times.

The exact size of the IPO is as follows:

Shares denominated in yuan will be worth an estimated $19.3 billion in dollars. Also, a greenshoe allotment will further expand this value to $22.2 billion. Greenshoe was exercised in this deal thanks to the strong demand of institutions.

This is not the first time China boasted the world’s largest IPO. It was China that boasted of the world’s biggest IPO in 2006 when the ICBC raised $19 billion.

Here are some Facts and Figures:

China’s IPO offerings have been more than the annual economies of many under-developed and developing countries of Asia and Africa.

AgBank is headed by Xiang Junbo. He is a war veteran, as well as a scriptwriter who has received many awards. The bank has a total of 440,000 employees in its 24,000 branches that service a total of 320 million customers. This figure is more than the entire population of the US.

The allotment and the IPO will make AgBank the fourth largest on earth in terms of market capitalization, with a total value of $150 billion US. The first three are also Chinese; CCB, ICBC and HSBC.

While Chinese indexes have underperformed other countries’ indexes, returns on Chinese IPOs have been quite satisfactory. The Shanghai index is down 22% over the past several months, and it is the steepest drop when compared to the top 10 stock exchange round the world. But initial public offerings in China have increased 29% (during their first month of trading). The strong performance of Chinese IPOs could be contributing to the overvaluation of the Chinese market. In addition, strong IPO performances are signs of a bubble forming. During the tech boom some IPOs rose over 100% on their first day of trading. Agbank's IPO could be further evidence of a possible coming collapse of the Chinese economy.

Disclosure: None

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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LwC - 4 years ago
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