Valuations That Will Make You See Red

Are you trying to keep tabs on the nascent Chinese capital markets? We can help. 

Bank of Nanjing Co. and Bank of Ningbo Co. may raise a combined $1.46 billion in the first initial public offerings by Chinese city lenders, seeking funds to help fend off larger competitors.

Bank of Nanjing, part-owned by BNP Paribas SA, may raise as much as 6.93 billion yuan ($914 million) selling 630 million shares, it said in a filing to the Shanghai exchange. Bank of Ningbo will sell 450 million shares in Shenzhen, raising up to 4.14 billion yuan. Bloomberg

The budding bankers have many irons in the fire, and undoubtedly more deals will follow.  The current enthusiasm for financial issues in China is hard to miss. Have you ever seen banks trading across the board at 40x earnings? 

The two deals will raise nearly $1.5 billion. And they will be relative bargains.  They will likely price, as is customary, at a discount to their comps.  The two IPO’s are coming out of the chute at approximately 35x earnings.  China’s 10 publicly traded banks trade at an average of 39x earnings, numbers that would likely make American and European CEO’s turn green with envy. 

But, according to Asian analysts, it is completely justified:

``They are niche players that stand out from the crowd,’’ said Gu Zhonghan, an analyst at E Fund Management Co. in Guangzhou, which manages 130 billion yuan. ``These two banks are focused on the wealthiest region and their profitability and asset quality are among the best.’’

Chinese analysts are trying to justify the valuations given that bank profits are growing at a 50% annualized clip. And the stocks are trading at a discount to the earnings growth rate.

It might be laughable to you. That type of simplistic analysis does not fly over here any more.  But it won’t seem silly to them until something goes wrong.

The Chinese seem to be quick studies, but not all of them will graduate from the school of hard knocks.

Or appreciate the scars that multiple contraction can leave.

Nanjing bank, Ningbo May Raise $1.46 billion in China
Bloomberg
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No positions

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