Having helped hundreds of Chinese companies to list, Citic Securities knows what it takes to lure investors to a deal. And China’s largest brokerage is making good use of that as it is now looking to list in Hong Kong. The firm kicked off the institutional bookbuilding for a Hong Kong IPO of between HK$12.8 billion and HK$15.1 billion ($1.6 billion to $1.9 billion) on Friday and is said to have received strong demand from institutional investors.
According to sources, the order books were fully covered by the end of the first day as the institutional tranche was two times subscribed. Orders mainly came from Hong Kong, London and China-based investors and the quality of the book was “outstanding”, said one source. Six cornerstone investors have agreed to purchase a combined $850 million worth of shares, or between 45% and 53% of the total offering, depending on the final price.
The largest among the cornerstones is asset manager Waddell & Reed, which is buying $300 million worth of shares. Kuwait Investment Authority is investing $200 million, Temasek Holdings $150 million, Brasilian investment bank BTG Pactual $100 million, and Fubon Life Insurance and hedge fund manager Och-Ziff are each putting up $50 million.
There are two reasons for investors to be interested in the deal. Although there have been IPOs of the Hong Kong branch of mainland brokerages in the past, Citic Securities is the first company that offers international investors direct access to China’s brokerage sector. It also has several number ones to its name: in 2010 it was the largest investment bank in China by net assets, as well as the most profitable brokerage. It also had the biggest investment income and raised more IPO funds on behalf of its clients than any other brokerage in China.
That competitive position allows Citic Securities to take advantage of China’s still underdeveloped capital markets and grow with it. China has around $3 trillion of private savings sitting idle in domestic deposit accounts, while thousands of medium and smaller companies are starved of capital. Equity and bond transactions could marry the two successfully.
Citic Securities reaped Rmb30 billion ($4.4 billion) in revenues last year, up 27% year-on-year, and recorded a 26% increase in net profit to Rmb11 billion. The company, which is 24%-owned by the country’s first state-owned corporation, Citic Group, listed in Shanghai in 2003 and currently has a market value of $19 billion.
Still, the firm is expanding aggressively. In June, it agreed to pay $374 million for a 19.9% stake in CLSA, a Hong Kong-based brokerage that is 65%-owned by Credit Agricole, to enhance its capacity in research, broking, equity capital markets and financial advisory. Citic Securities said in a statement that 65% of the proceeds from its IPO will be used to establish or acquire overseas research platforms and sale and trading networks.
“Like any other industries in China, the state-backed players are always favoured by the government policies. Citic’s expansion is supported by the government,” said Deng Shubin, a Shanghai-based analyst at Central China Securities.
Apart from its overseas expansion, Citic Securities is likely to acquire some of its smaller domestic competitors in the coming years, although these smaller brokerages receive a lot of protection from local governments, making them a difficult merger target, Deng said.
There are currently 109 brokerages in China, according to the China Securities Regulatory Commission (CSRC). The market is dominated by a handful of the leading players, while the smaller ones survive on simple and basic service charges, such as brokerage fees.
Another reason for investors to get enthusiastic about Citic’s IPO is the fairly reasonable price the brokerage offers due to the current turbulent markets and the company’s urge to list in Hong Kong. Another source said Citic is determined to brave the volatile market even if it means raising less money than its original target. “The market condition is not favourable, but the brokerage would feel [like it is] losing face if it calls it off,” said the source.
Citic Securities is offering 995.3 million new H-shares at between HK$12.84 and HK$15.20 apiece. The H-shares will account for 9.1% of the enlarged share capital. Based on the company’s 2012 forecast earnings, the price range translates into a price-to-book multiple of 1.18 times to 1.39 times, and a price-to-earnings (P/E) ratio of 13.42 times to 15.88 times.
The price range also represents a 13.4% discount to a 2.5% premium compared to the 20-day volume-weighted average price (VWAP) of Citic’s A-shares, which works out at Rmb12.16. The company hopes this will allow for a good secondary market performance, one source said. By setting the range at a sizeable discount to the existing A-share price, the bookrunners have also given themselves a lot of flexibility in case the A-share price should drop significantly during the bookbuilding.
Citic’s Shanghai-listed shares have fallen more than 20% from their peak of Rmb15.38 on March 7 and closed at Rmb12.18 on Friday. The stock is currently trading at a 2012 P/E multiple of 14 times. The Shanghai Composite Index has lost 13% so far this year, but experts believe there is room for Chinese stocks to regain their losses.
“Chinese stocks are already very low, it is hard to imagine the prices could be lower,” said Fan Gang, head of the National Economic Research Institute, in an interview with Bloomberg TV.
Citic has earmarked 5% of the deal for Hong Kong retail investors, although this could be increased to as much as 20% under a clawback mechanism. The remainder will be sold to institutional investors, including the six cornerstones. The deal comes with a traditional 15% greenshoe option which, if fully exercised, will allow the company to raise up to $2.2 billion.
The IPO price will be fixed on September 28 and the Hong Kong listing is scheduled for October 6. ABC International, BOC International, Bocom International, CCB International, Citic Securities and ICBC International are joint bookrunners for the deal, while Bank of America Merrill Lynch, CLSA, HSBC and Morgan Stanley are acting as international co-ordinators.
