China Banks' Bad Debt Could be a Boon for Cinda IPO

At a time when bad debt is looming among China’s banks, one initial public offering that could stand to benefit is that of China Cinda Asset Management Co. Ltd.

The debt-clearing agency is planning to raise up to US$2 billion in its IPO in Hong Kong, which could shed light on the health of China’s banking system.

One pre-deal research report  in fund managers' inboxes comes from Cinda’s own brokerage, Cinda International(0111.HK) Securities. Cinda International says that on average, between 2010 and 2012, Cinda made returns of over 110% in disposing of bad debt, making gains through cash, securitization or swapping loans for equity.

The company is planning to start taking orders for its IPO on Nov. 25. Three pre-deal research reports from underwriters BOC International, Goldman Sachs and JP Morgan Chase & Co ascribe it a fair value of between CNY97.3 billion and CNY131.2 billion (US$16 billion –US$21.5 billion)

Goldman says its valuation of up to HK$131 billion values the buyer of bad debts at 1.1-1.4 times the debt agency’s 2014 book.

Cinda is one of four asset-management firms China established to clean up the country’s banks before those lenders went public over the past decade. In recent years, Cinda has branched out into businesses like fund management, insurance and brokerage. But taking nonperforming loans from Chinese banks remains the bulk of Cinda’s business, accounting for 64% of 2012 profit before tax.

Goldman says it expects Cinda’s net profit to grow by 19% to CNY8.7 billion this year, with earnings set to rise 24% on average between 2013 and 2015.

“Cinda could play a key role in managing potentially substantial NPLs [non-performing loans] in China’s financial system,” Goldman said.

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BOCI notes in its report: “In our opinion, the China distressed-asset market will grow rapidly in the next few years as economic growth slows and economic restructuring advances.”

The share of non-performing loans  among total loans at Chinese banks remains low, at below 1%. But debt levels in the country are rising, following massive lending by banks since the financial crisis. The ratio of debt to gross domestic product in China has risen, from 120% in 2007 to 180% in 2012. Including loans issued by the country’s shadow banks, debt levels have tripled since 2007, according to Fitch Ratings.

-Fiona Law contributed to this article.