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Monday, 23 October 2017

1997: China Telecom's US$4.2bn IPO: landmark privatisation

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Creation of a national champion - It is hard to imagine many more challenging times than late 1997 to attempt a record-breaking Asian IPO. The Asian crisis had begun in May, and the effects were soon to feed through to the Hong Kong market.

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It is hard to imagine many more challenging times than late 1997 to attempt a record-breaking Asian IPO. The Asian crisis had begun in May, and the effects were soon to feed through to the Hong Kong market.

Against this backdrop, China Telecom, since renamed China Mobile, achieved the largest Chinese equity raising by that date, completing a US$4.2bn IPO in Hong Kong and New York. Investors were excited by the Chinese government’s plans to inject mainland assets into Hong Kong-listed companies and had piled into “red-chip” stocks, but still the deal was in uncharted territory.

“This was the first central government-sponsored, massive privatisation through an IPO, so people didn’t know how it would play out over the longer term,” said Mark Machin, who worked on the deal during a 20-year career at Goldman Sachs and is now Asia president of the Canada Pension Plan Investment Board. “It was also an entirely new sector from China. There were no other publicly listed telecom entities from China at the time – this was the first.”

Joint bookrunners CICC and Goldman Sachs were awarded the mandate in April.

“The mandate was pretty simple, but also pretty daunting: do an IPO of something in the telecom industry, make sure it’s over US$2bn, make sure it’s done in Hong Kong and New York, make sure it’s done by October, and make sure it’s a huge success,” said Machin.

The bookrunners had the relative freedom to choose which telecom assets to include, looking for example at China’s satellite communications sector before settling on its nascent mobile network as the most promising listing candidate, and choosing its two most developed provinces to include initially, with others to be injected later.

After that, a management team had to be put into place swiftly and an extensive restructuring completed, with chairman Shi Cuiming joining from the Ministry of Posts and Telecommunications, and Ding Donghua joining as chief financial officer.

“The CFO we only finalised a couple of weeks before the research analyst presentation,” said Machin. “We were cooped up in a hotel in Shenzhen, and day and night we briefed him on every possible aspect of the company and the financials. The hotel was completely empty except for us.”

Hiked

The leads went out with guidance of HK$7.75–$10.00 per share, but hiked it to HK$9.50–$12.60 as momentum built, eventually pricing it at HK$11.80.

“We went to every corner of the market worldwide and turned over every rock to find investors,” said Bi Mingjian, previously CICC’s deputy CEO and head of the CICC telecom team. 

The stock was listed in Hong Kong on October 23, a day on which the Hang Seng index fell 10.4%. Despite that setback, China Telecom recovered to end the week 3% above its IPO price.

The success of the IPO provided a template for China to restructure and list state-owned enterprises.

“It had great significance for what happened later on,” said Bi. “PetroChina and Sinopec were fully convinced that this was the way for them to solve their problems.”

The listing of the first Chinese “national champion” cleared the way for others to follow in the aluminium, energy and financial sectors.

“Ministries were turned into industries,” said Greg Chu Gang, CICC’s acting head of capital markets and vice-chairman of its investment banking committee. “A wave of blockbuster deals were launched in Hong Kong.”

As well as providing a gateway for Chinese companies to tap foreign capital, the deal also put Hong Kong on the map for foreign issuers.

“The Hong Kong market was still a regional market then,” said Bi. The biggest H-share deal at that time had been the US$600m-equivalent IPO of China Southern Airlines, but many foreign issuers have since been lured to Hong Kong, with IPO activity in the city-state often beating that in the US markets.

In addition, foreign investors now pay more attention to Chinese companies.

“Because of the growth of the market, large international investors have set up shop and beefed up their research efforts,” said Chu. “International money understands China a lot better.”

And lately, there have been more listings coming from – admittedly smaller – private sector companies rather than solely SOEs. The domestic investor base has also changed, said Chu, with Chinese corporates investing in IPOs and more mainland funds and insurance companies establishing capacities to invest in the Hong Kong market.

All that didn’t begin with the China Telecom/Mobile listing. But the deal was the major landmark along the way.

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