Bocom bubble

26 April 2007 By Martin Hutchinson

The bank is now blocked from taking a bigger stake in China s Bank of Communications. And Bocom s Shanghai float has diluted its position. With Bocom trading at an eyepopping multiple, and HSBC s stake now worth five times what it paid, this might be a good time to sell.

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The Bank of Communications, China's fifth largest bank, which has been listed on Hong Kong since 2005, offered 3.2bn A shares on the Shanghai exchange for an expected value of $3.3bn at an expected issue price of 7.9 yuan per share. Bocom stock closed at HKD8.37 on 26th April, a 4% premium to the expected Shanghai issue price. Demand for the issue totalled 1.46tn yuan ($189bn.)

Bocom had 2006 net income of 12.3bn yuan and total assets of 1.71tn yuan. BOCOM's Hong Kong price represents a P/E ratio of 30.6 on 2006 earnings.

HSBC purchased 19.9% of Bocom in 2004 for $1.75bn with a clause allowing it to buy up to 40% when China expanded foreign investor limits. The Chinese government owns directly 41% of Bocom. After the new issue, HSBC will own 18.6% of Bocom; its stake will be worth $9.5bn.

The China Bank Regulatory Commission on April 10th reclassified Bocom as a large stateowned bank instead of a jointstock bank making it an integral state asset essential for ensuring government control over the economy and making it very unlikely permission would ever be granted for HSBC to own a controlling stake in Bocom.

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