Financial Institutions In Hong Kong BUS 310 SEC 3

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Financial Institutions In Hong KongBUS 310 SEC 3

• Group 3
• Topic Steps of underwriting of investment bank
  and a case study of China Construction Bank

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Agenda

• The nature of investment bank
• Steps done by the investment bank in helping
  firms to underwrite securities
• Case study of China Construction Bank
• Recommendations
• Multiple Choice Questions

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Nature of Investment Banks

• International that help corporations raise funds
• Not only underwriting the initial sale of stocks
  and bonds
• As deal makers in the mergers and acquisitions
  area
• As intermediaries in the buying and selling of
  companies
• As private brokers to the very wealthy
• Well-known investment banking firms Morgan
  Stanley, Merrill Lynch, Salomon Brothers, etc.

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Steps done by the investment bank in helping
firms to underwrite securities
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Rearrange the correct steps of the investment
bank in helping firms to underwrite securities!!
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Correct Sequence

• G?E?C?B?D?A?F

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Step 1

• Giving advice
• When financial managers at most firms are not
  familiar with how to proceed with a new security
  offering
• E.g. firm may not know if it should raise capital
  by selling stocks or by selling bonds
• ? help by pointing out that the market is
  currently paying high prices for stocks in the
  firms industry, while bonds are currently
  carrying relatively high interest rates

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Step 1 (con t)

• When securities should be offered
• E.g. competitors have recently released earnings
  reports that show poor profits, it may be better
  to wait before attempting a sale.
• Firms want to time the market to sell stock when
  it will obtain the highest possible price

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Step 1 (con t)

• Most difficult advice? give a customer possibly
  concerns at what price the security should be
  sold
• ? Investment banker and the issuing firm
  may have different motives
• However, investment bankers do not want to
  overprice the stock
• ? They will buy the entire issue at the
  agreed price and then resell it through their
  brokerage houses
• selling the stock at a slightly higher price than
  they paid the issuing firm? earn a profit
• If the issue is priced too high
• the investment bank will not be able to resell?
  loss

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Step 1 (con t)

• Initial Public Offering (IPO)? much more
  difficult to determine what the correct price
  should be
• If the issuing firm and the investment banking
  firm can come to agreement on a price, the
  investment banker can assist with the next stage
• filing the required documents

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Step 2

• Filing documents
• One of the required documents is the Securities
  and Exchange Commission (SEC) filing

Securities and Exchange Acts of 1933 and 1934
construct it
Objective ensure sufficient information reaches
potential investors
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Step 2 (con t)

• Who are required to fill the document?

Issue offerings with the amount over 1.5 million
in a year and with maturity longer than 270 days
Includes the firms financial condition,
management, competition, industry and experience,
risk of the securities, the use of funds
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Step 2 (con t)

• Only if the statement does not reject by the SEC
  in 20 days can the securities be sold

Approval will only mean that all of the required
statements and disclosures are included in the
registration statement
While waiting for the approval of registration
statement
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Step 2 (con t)

• Investment banker have to acquire a credit rating
  from credit review company
• Banker should hire bond counsel to issue a
  statement attesting to certify the legality of
  the issue
• Select a trustee responsible for seeing the
  issuer fulfills its obligations as stated in
  securities contract
• It helps to print the securities and prepare to
  distribute to the public

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Step 3

• Underwriting of securities
• Purchase all the offerings from issuer

• Investment bank agrees to underwrite an
• issue and this certifies the quality of the
• issue to the public.

Investors can rely on the investment bank to
decide the values of the firms securities
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Step 3 (con t)

• Reduces its risk by forming a syndicate
• a group of investment banking firms purchase a
  portion of the security issue
• responsible to resell all its shares

Advertising the upcoming securities offerings at
newspaper Not an offer to sell, is an
announcement only
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Step 4

• Resold securities to the public
• Before the issue date
• - Large brokerage houses (nationwide)
• - Sales agents contact the customers
• Goal
• - Fully subscribe
• - Under subscribe
• - Over subscribe

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Step 4 (con t)

• Alternatives to sell the securities
• - Best effort agreement
• --gt On a commission basis
• --gt No guarantee of the price
• - Private placement
• --gt Limited Large amount s buyers
• E.g. Insurance Company, Pension Fund
• --gt Common for the sale of BOND

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Case Study China Construction Bank (CCB)
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Case Study of CCB

• Issuance of initial public offering (IPO)
• Stock price range 1.8 - 2.25
• At least 1000 shares per investor
• Management level? upper limit of stock price?
  2.3? raise more funds higher risk!!
• 20/10/2005 price range 1.9 -2.4
• 14 - 19/10/2005? investors acquire the stocks

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Case Study of CCB

• Dealing Arrangement
• 27/10/2005 (Thursday)
• 930am
• 1000 H-shares per lot
• Stock price 2.35
• Estimate raising HK 60 billion

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Case Study of CCB

• Over subscription
• Public offering 40 times
• International offering 10 times

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Case Study (CCB)

• Underwriters for the Hong Kong Public
• Offering
• Joint Lead Manager
• China International Capital Corporation (Hong
  Kong) Limited
• Morgan Stanley Dean Witter Asia Limited
• Credit Suisse First Boston (Hong Kong) Limited
• CCB International Capital Limited

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Case Study of CCB

• Co-Lead Managers
• BNP Paribas Peregrine Capital Limited
• CITIC Capital Markets Limited
• The Hongkong and Shanghai Banking Corporation
  Limited
• Oriental Patron Asia Limited

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Case Study of CCB

• Co-Managers
• Bank of America (Asia) Limited
• China Merchants Securities (HK) Co., Limited
• CMB International Capital Corporation Limited
• Guotai Junan Securities (Hong Kong) Limited
• Shenyin Wanguo Capital (H.K.) Limited
• South China Securities Limited
• Tai Fook Securities Company Limited

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Case Study of CCB

• Commission Expenses
• Underwriters? gross underwriting commission 2.5
  of the offer price
• ? Syndicate

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Case Study of CCB

• Stabilization and over-allotment
• prevent decline in market price below
• offer price
• bid or purchase in secondary market
• during specified period
• may over-allocate or effect short sales
• at higher level than the open market

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Case Study of CCB

• Short sales Stabilizing Manager sale a greater
  number of H shares than the underwriters are
  required to purchase in the Global Offering
• Covered short sales sales made in an amount
  not greater than the over-allotment option

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Case Study of CCB

• The Hong Kong Public Offering
• offering 1,324,298,000 Offer Shares at the offer
  price for subscription by the public in Hong Kong
• about 5 of the 26,485,944,000 Offer Shares
  initially available under the Global Offering

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Case Study of CCB

• Offer Price Range
• not more than HK2.40 per Offer Share
• not less than HK1.90 per Offer Share

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Case Study of CCB

• Determining the Offer Price
• book-building
• requesting prospective investors
• interest in acquiring our H shares in the
  International Offering
• specify the number of our H shares under the
  International Offering they would be prepared to
  acquire either at different prices or at a
  particular price
• continue up to and to stop on or around October 25

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Case Study of CCB

• fixed by agreement between underwriters and CCB
• price determination date is expected to be on or
  around October 20
• no later than October 25

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Case Study of CCB

• The international offering of H-shares
• CCB provides the international underwriters the
  over-allotment option
• required to allot and issue up 3,972,890,000
  additional shares
• International Offering Underwriters can exercise
  it within the 30-day period from the last day for
  the applications in the Hong Kong Public offering
  
• 15 of the shares offered initially in the global
  offering

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Case Study of CCB
The performance of the stock of CCB at Hong Kong
Stock Exchange Market
Date Start Highest Lowest End Amount of Transaction
10/11 2.45 2.50 2.42 2.50 789,161,984
09/11 2.35 2.45 2.33 2.40 2,672,556,544
08/11 2.35 2.35 2.33 2.35 122,748,000
01/11 2.35 2.35 2.33 2.35 322,641,984
31/10 2.35 2.35 2.33 2.35 282,432,032
28/10 2.33 2.35 2.30 2.35 2,111,222,272
27/10 2.35 2.38 2.35 2.38 3,637,142,272
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Recommendation

• over 40 times of over subscription
• increase the price of each share
• can raise more funds

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Q A
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Question 1

• Issuer issues offering with amount over how
  many dollars and maturity days should fill a
  registration statement with the SEC ?
• A.) 1.4 million and 270 days
• B.) 1.5 million and 100 days
• C.) 1.4 million and 100 days
• D.) 1.5 million and 270 days

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Answer of Question 1

• C

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Question 2

• If you bought 1,000 shares of CCB at the offer
  price with 1 brokerage commission, 0.005
  transaction levy, 0.002 investor compensation
  levy, 0.005 trading which cost you 2373.79 in
  total, then at what price will you sell the stock
  without a loss?
• (Assume the commission required to pay to bank
  is 100 once you sell the stock)

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Question 2

• A.) 2.47379
• B.) 2.50
• C.) 2.35
• D.) 2.4899

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Answer of Question 2

• A

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Question 3

• Every investor must purchase at least
• how many shares of CCB?
• A.) 2000 shares
• B.) 2500 shares
• C.) 1500 shares
• D.) 1000 shares

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Answer of Question 3

• D

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ENDTHANK YOU!!