Bad-loan manager Cinda to use IPO for leverage

China Cinda Asset Management, the first mainland bad-loan manager to seek a Hong Kong stock market listing, said it plans to increase the leverage of its balance sheet with a view to future growth on the back of an ample capital base.

Beijing-based Cinda Asset, a specialist in troubled assets primarily engaged in the mainland's property sector, is also looking to diversify its financing channels as financial reforms on the mainland designed to give the market a bigger role threaten its previous reliance on inexpensive funding sources from the central bank and Ministry of Finance.

Cinda Asset's indebtedness and assets are set to expand after the Hong Kong float, taking advantage of the firm's relatively strong capital base, company vice-president Gu Jianguo, a specialist in asset and liability management, told a media briefing in Hong Kong yesterday.

Gu, a former executive director of Hong Kong-listed Cinda International, a sister company of Cinda Asset, said the bad-loan manager's capital adequacy ratio, which determines a financial institution's capacity to meet its liabilities and other risks, would reach about 23 per cent after raising fresh capital in the US$2.5 billion initial public offering.

Cinda Asset's first-half capital adequacy ratio stood at 17.8 per cent, well above the officially required level of 12.5 per cent, it said in its listing prospectus.

Meanwhile, Cinda Asset's borrowings, which account for more than 60 per cent of its funding, have expanded exponentially in the past three years, from 7.83 billion yuan (HK$9.96 billion) in 2010 to 76.1 billion yuan last year, representing a compound annual growth rate of 113.4 per cent, and further soared to 104.1 billion yuan in June this year, while return on equity, a measure of profitability, dropped from 25.5 per cent to 15.8 per cent between 2010 and last year, and edged down further to 14.6 per cent in June, raising queries over its ability to generate meaningful returns despite a leverage spike.