Backdoor listing boosts Citic Pacific

Citic Pacific's share price rose as much as 31 percent on Thursday after its parent company Citic Group's injected assets.

The company announced that it agreed to acquire 100 percent of Citic Ltd, its parent's main operating unit, with about $36 billion of shareholder equity.

Citic Pacific is a Hong Kong-listed company, with focuses on special steel, iron ore and property development on the Chinese mainland. It is 58 percent owned by Citic Group, a State-owned Enterprise headquartered in Beijing.

The deal would be the largest asset injection into a Hong Kong-listed company from the Chinese mainland, data from Bloomberg show. It will also be the first SOE to go public in Hong Kong.

Citic Pacific will purchase the assets with cash and new stocks, which will be issued at HK$13.48 per share.

Citic Ltd, substantially all of the assets of Citic Group, has diverse businesses in securities, mining machinery and real estate. As of 2013, it had unaudited combined total equity of about 225 billion yuan and net income of 34 billion yuan, excluding its interest in Citic Pacific.

Chang Zhenming, chairman of Citic Pacific, said in a statement that the transaction would "greatly increase the breadth and scale of our business, providing an enlarged asset and capital base from which to improve our competitiveness and capture growth opportunities in China".

He added the company will be committed to in Hong Kong, which has an established legal framework, high governance standards and international connectivity.

Roy Lo, deputy managing partner at Shinewing (HK) CPA Ltd, said Citic Group can list overseas as a conglomerate by injecting quality assets into its holding company.

"The transaction has set a good example for other Chinese SOEs that are typically headquartered on the mainland and own a company listed in Hong Kong," said Lo. "The back door listing can help them achieve internationalization and bring the best assets to Hong Kong investors."

If completed, Citic Pacific will become the largest listed conglomerate in China.

The deal will also expose SOEs to more uncertainties after listing in an international capital market, Lo added.

"International investors, including institutional investors and investment funds, can have more participation in SOEs and the company itself will expect to issue more derivatives."

The deal came right after China advocated more private investment in State business. On March 24, the State Council issued a new notice encouraging SOEs to bring in private capital via stock issuance and cooperation.

Michael Every, head of Financial Markets Research Asia-Pacific at Rabobank, a Dutch multinational banking and financial services company, said that SOEs can re-contracture their debts by raising more foreign capital.

"The timing is very interesting because debt issues are emerging on the Chinese mainland with increasing nonperforming loans made by major banks," said Every.

Every said it is part of the reform process in China and also a defense measure for Chinese companies.

The proposed transaction is awaiting approval from shareholders. Citic Pacific's shares closed at HK$14.30 on Thursday, up by 12.95 percent.