FUND RAISING: Slowing Economy Undermines BOC, Great Wall Motor Deals

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Bottom line: Muted interest in Great Wall Motor’s fund-raising plan and Bank of China’s sale of a major asset reflect weakening investor interest in such deals due to the slowing Chinese economy.

Weak sentiment pressures, BOC, Great Wall Motor deals

Funding for Chinese Internet companies is showing no signs of slowing just yet, but reports of weak demand for 2 other deals reflects fading investor interest in more traditional sectors as China’s economy slows. The first of those has car maker Great Wall Motor (HKEx: 2333; Shanghai: 601633) sharply reducing plans for a new issue of A-shares on China’s domestic stock markets. The second has Bank of China (HKEx: 3988; Shanghai: 601398) attracting scant interest for the sale of a major asset in Hong Kong.

Neither of these developments comes as a huge surprise due to growing worries over China’s rapidly slowing economy. Great Wall was never one of China’s top auto makers to start with, and the big reduction in its 16.8 billion yuan ($2.6 billion) fund-raising plan comes as the domestic auto market slows and investors pile out of China’s crumbling stock markets. Meantime, Bank of China has been trying to sell its Hong Kong-based Nanyang Commercial Bank for a while now, and the latest reports say only 1 interested party has emerged.

Lukewarm reception for both deals reflects a new reality that is likely to put a major damper on new fund-raising and M&A in China in the next few years. Such activity has been quite common over the last decade when the economy was soaring, as both domestic and international investors paid big premiums to buy into the China growth story. That doesn’t mean that the deal making will end, but we’re likely to see far smaller volumes and more modest valuations comparable to those seen in more mature western markets.

Let’s begin with the Great Wall Motor，whose shares were initially suspended in June when it first announced the fund-raising plan and have lost nearly half their value since then in sync with China’s own stock market sell-off and softening demand for cars. The company had originally given the 16.8 billion yuan figure for the top end of its fund-raising plan, but has now scaled back the amount by about 30 percent to as much as 12 billion yuan. (English article; Chinese article)

Great Wall made its latest announcement the same day it said that its profit for the first half of the year rose 19 percent to 4.7 billion yuan, missing analysts’ forecasts for 4.9 billion yuan. Frankly speaking, the reduced fund raising target still looks quite optimistic to me, and I wouldn’t be surprised to see Great Wall reduce the number further still or even scrap the plan completely if China’s stock markets continue their downward spiral.

High Price Tag

Next there’s Bank of China’s plan to sell its Hong Kong-based Nanyang Commercial Bank, which has been in the headlines since late January when media first reported it was eyeing up to $6.8 billion for the unit. (previous post) Later reports said a number of companies were interested in the asset, but now the latest ones say that bad asset manager Cinda Asset Management (HKEx: 1359) has placed the sole bid for the lender. (English article; Chinese article)

Price may have been an element that scared away many potential buyers, since the latest reports say Bank of China was seeking up to $8.8 billion for Nanyang — a record for any Hong Kong bank and well above the previous figures. Cinda’s shares fell on the report, as investors questioned what value Nanyang would bring for the company and also the high price tag.

In this case the reports are citing the high asking price for lack of bids for an asset that would have attracted strong interest just a year ago when the China market was booming. Perhaps that’s true, though cooling sentiment about China’s economy almost certainly played a role too. That’s because Nanyang has strong exposure to the Chinese market due to its Hong Kong location and 30 mainland branches. Demand for this kind of deal is likely to cool considerably in the next few years, with valuations dropping as China’s economy settles into a new phase of slower growth.

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