The Largest IPO Ever

Did you make a few bucks by flipping hot technology and internet IPOs during the dot-com boom? A lot of people did, but that U.S. IPO market has pretty much dried up and the few IPOs that have come to market haven’t been very exciting.

The Chinese IPO market is a completely different — and extremely profitable — story.

According to Bloomberg, Chinese IPOs have delivered an AVERAGE gain of 32% in their first month of trading. Not bad work if you can get it, right?

• Example #1: Chongqing Water Group jumped by 55% in its first month.

• Example #2: East Money Information Co., the Shanghai-based provider of online financial information, soared by 117%.

So far this year, Chinese companies have sold a total of $25 billion of IPOs, which is three times more than were sold in the U.S.

Ha! That’s nothing because the dollar amount of Chinese IPOs is about to double this week when China Agricultural Bank sells its initial public offering on the Hong Kong and Shanghai markets.

If it gathers the expected $25 BILLION that it is expected to raise, that would make it the LARGEST IPO IN THE WORLD. By the way, the second largest IPO in financial history was back in 2006 when the Industrial & Commercial Bank of China (IDCBY.PK) went public and raised $22 BILLION.

China Agricultural Bank was founded in 1951 and is the second largest bank in China. It employs more than 300,000 people, has $1 billion in deposits, 350 million customers, and 24,000 branches. It is second in size only to Commercial and Industrial Bank and the last of the “big four” state-owned banks to go public.

It also holds the distinction of being the target of the largest bank robbery in China’s history. In 2007, two managers embezzled almost US$150 million.

Some pretty savvy institutions are jumping on this deal. The sovereign investment funds of Qatar (US$2.8 billion), Kuwait (US$800 million), and Singapore (undisclosed) have agreed to invest in the deal, as well as Australian investment company Seven Group Holdings (US$250 million), China Life, and Dutch bank Rabobank.

Those mega-million dollar investors are generally long-term investors because they often pledge to hold a high percentage of their shares for six to 12 months. This “lock-up” period prevents them from flipping their shares right away.

Individual investors, like you, do NOT face that type of handcuffing and you can sell your shares any time you want.

So far this year, Chinese companies have sold $25 billion in IPOs — three times more than were sold in the U.S.

I am not recommending that you buy a mountain of China Agricultural Bank. You should always do your own homework and make sure that any stock is appropriate for your tolerance for risk and time horizon. But even if this IPO isn’t right for you, there will be plenty of additional IPO action later this year:

• Beijing-Shanghai High-Speed Railway — The Beijing-Shanghai line is expected to be completed by 2011 and will cut travel between the two cities from 10 hours to just four. I expect its trains to be packed to the rafters every day of the week.

• China International Trust and Investment Corporation, China’s largest financial conglomerate, is going to sell off its real estate division later this year.

• The gem of the entire bunch could be Swire Property, the largest real estate developer in Beijing and Shanghai.

Among other promising Chinese IPOs on the horizon is Beijing-Shanghai High-Speed Railway.

How can you get in on these hot Chinese IPOs? Some, but not all of them, will be sold on the New York Stock Exchange or the Nasdaq. That means that you can ask your current broker to get shares for you just like any other American IPO.

The others will be sold on either the Shanghai Stock Exchange or the Hong Kong Stock Exchange. China Agricultural Bank, for example, will be dual-listed, which means it will be sold on both the Shanghai market as well as the Hong Kong stock exchange.

If it is sold on the Shanghai market … you’re out of luck. U.S. investors, other than pre-approved multi-billion dollar institutional investors, are prohibited from investing in the Shanghai or Shenzhen stock exchange.

NOTE: Foreign investors are also prohibited from directly investing in the Taiwan stock market.

If it is sold on the Hong Kong market … no problem. All you have to do is make sure your broker has an institutional trading desk (most do) and it is as easy as pie. Most discount brokers can handle trades on most major foreign stock markets — like Tokyo, London, Frankfurt, Korea, Singapore, Paris, Toronto, Hong Kong — so you’re probably ready to go and don’t even know it.

If you want to place trades on some of the less developed markets — like Indonesia, Malaysia, the Philippines, or Thailand — you may need to open an offshore account with an international broker, such as Zoom Securities.

However, if your broker can’t handle foreign transactions, you need to either (1) consign yourself to missing out on foreign IPOs or (2) find a new broker that can handle international trades.

Let me wave one big red flag in front of you. Those red-hot IPOs have delivered an average 32% gain in one month on average trade at 46 times earnings. That’s pretty pricey no matter how you slice it and that tells me that the smartest strategy is to treat these IPOs as short-term trading opportunities and not long-term holds.

One of my all-time great investment heroes, Bing Carlin who used to run Five-Star fund call IAI Regional, told me that “you have to fish in a trophy lake if you want to catch a trophy fish.”

When it comes to IPO riches these days, the “trophy lake” is certainly Chinese stocks and there’s a bunch of money to be made.

Best wishes,

Tony

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