Financial Institutions In Hong Kong BUS 310 SEC 3 Group 3 Topic: Steps of underwriting of investment bank and a case study of China Construction Bank

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

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.

Steps done by the investment bank in helping firms to underwrite securities

Rearrange the correct steps of the investment bank in helping firms to underwrite securities!!

Correct Sequence GECBDAF

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 firm’s industry, while bonds are currently carrying relatively high interest rates

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

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

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

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

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 firm’s financial condition, management, competition, industry and experience, risk of the securities, the use of funds

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

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

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 firm’s securities

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

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

Step 4 (con’ t) Alternatives to sell the securities: - Best effort agreement --> On a commission basis --> No guarantee of the price - Private placement --> Limited & Large amount ‘s buyers E.g. Insurance Company, Pension Fund --> Common for the sale of BOND

Case Study: China Construction Bank (CCB)

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

Case Study of CCB Dealing Arrangement: 27/10/2005 (Thursday) 9:30am 1000 H-shares per lot Stock price: $ 2.35 Estimate raising HK$ 60 billion

Case Study of CCB Over subscription: Public offering: 40 times International offering: 10 times

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

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

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

Case Study of CCB Commission & Expenses: Underwriters gross underwriting commission: 2.5% of the offer price  Syndicate

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

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

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

Case Study of CCB Offer Price Range: not more than HK$2.40 per Offer Share not less than HK$1.90 per Offer Share

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

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

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

Case Study of CCB Date Start Highest Lowest End Amount of Transaction 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 2.42 789,161,984 09/11 2.35 2.33 2.40 2,672,556,544 08/11 122,748,000 01/11 322,641,984 31/10 282,432,032 28/10 2.30 2,111,222,272 27/10 2.38 3,637,142,272

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

Q & A

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

Answer of Question 1 C

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)

Question 2 A.) $2.47379 B.) $ 2.50 C.) $2.35 D.) $2.4899

Answer of Question 2 A

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

Answer of Question 3 D

END THANK YOU!!