1. 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

2. 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

3. 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.

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

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

6. Correct Sequence
GECBDAF

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. Case Study: China Construction Bank (CCB)

20. 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
/10/2005 investors acquire the stocks

21. 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

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

23. 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

24. 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

25. 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

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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

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

36. Q & A

37. 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

38. Answer of Question 1 C

39. 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 $ 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)

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

41. Answer of Question 2 A

42. 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

43. Answer of Question 3 D

44. END THANK YOU!!