Vincent Fernando, CFA | Jul. 5, 2010, 12:43 AM

agricultural bank of china pic

Image: Wikimedia

All eyes are watching for the IPO success or failure of China's largest bank by customer base, Agricultural Bank.

It's hard enough that scores of IPOs around the world have been canceled due to weak global markets, but now Agricultural Bank's IPO pricing could look expensive if Chinese stock markets swoon further.

Already, the apparent valuation discount for the IPO, based on forward price-to-book ratio, had fallen to 5.3% as of Sunday, from 10.5% on June 24th.

Bloomberg:

The narrowing discount, the result of a drop in shares of publicly traded rivals such as Industrial & Commercial Bank of China Ltd., may make it harder for Chairman Xiang Junbo to raise the maximum $20.1 billion he’s seeking in Hong Kong and Shanghai. It may also dim the prospect of eclipsing ICBC’s record $21.9 billion IPO in October 2006, even when taking into account an option to boost the sale by 15 percent.

“We’re not in an environment where people are going to be biasé about valuations, and as things have sold off, it’s put some pressure on them,” said William Fries, a fund manager at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $57 billion.

Then again, maybe a 5% change to your price-to-book discount really matter that much when your forecast book value is an educated guess at best, and could disappear in a heartbeat due to surprise loan losses, off-balance sheet issues, etc..

Still, as potentially the world's largest share listing, the outcome of Agricultural Bank's IPO could make or break the Chinese market's perception of its own sentiment. Few investors want to feel like there's little investor appetite to buy stocks coming after them.

Dow Jones:

Agricultural Bank of China Ltd.'s (1288.HK) upcoming initial public offering has attracted pledges of subscription from institutional investors including China-based fund management firms and Hong Kong-based investors and banks, a person familiar with the deal said Monday.

China Cinda Asset Management Corp., Great Wall Fund Management Co., China Taiping Insurance Group Co., Hong Kong-listed Bank of East Asia Ltd. (BKEAY, 0023.HK), Wing Lung Bank Ltd. and Hong Kong tycoon Joseph Lau Luen-hung are among those institutional investors, the person said.

Thus let's hope these early reports of institutional demand represent large actual quantities of IPO subscriptions.