Huatai Securities, China's largest stock brokerage by trading volume, has raised HK$34.7 billion ($4.5 billion) on the Hong Kong Stock Exchange, pricing the listing at the top of the price range.
The broker, also known by the acronym HTSC, priced its 1.4 billion new H-shares at HK$24.8 per unit, qualifying the deal as the largest flotation in the Asia Pacific region this year.
Recent equity offerings by Chinese brokerages have been extremely well received by the market, with strong post-listing performance affirming the sector's allure for investors.
Shares of GF Securities, one of Huatai's rivals on the mainland, have surged 35.8% since it issued H-shares in early April.
China Galaxy Securities, another competitor, saw its stock soar 8.4% after it raised $3.1 billion through a private placement on April 27.
Moreover, the rallying Hong Kong Stock Exchange has drawn investors’ attention to equity deals on the primary and secondary market. Hong Kong IPOs this year gained an average of 391% as of May 22.
Capital event
Huatai’s listing triggered massive demand from roughly 800 institutional lines -- a figure made all the more remarkable given that the book had already been fully covered by anchor investors at the launch of the roadshow, according to bankers on the deal.
One ECM banker away from the deal said that cornerstones had fought to participate in the IPO. Several had approached him to secure share financing and even though he provided the leverage they were turned away given overwhelming demand from other sources. He said his clients were deeply frustrated.
Various institutions, including large global long-only funds, sovereign wealth funds, hedge funds and asset management firms, participated in the offeriong. And nearly all commitments came in at the high-end of the price range, according to one banker on the deal.
Greater availability of leverage for investors has amplified the level of demand for IPOs in Greater China across recent months.
There is more than $60 billion in gross demand in the institutional book for Huatai’s $4.5 billion IPO, said one person familiar with the matter.
When AIA raised $20.5 billion in its Hong Kong IPO in 2010 there was around $80 billion of demand.
Mainland institutions showed acute interest in the offering, with QDII accounts, banks, insurers, corporates and funds vying to get in on the H-share offering.
Huatai’s A-shares have risen sharply -- by 2.7 times since October -- giving impetus to mainland institutions to get in on the H-share action.
Retail investors piled on. As of Friday morning, orders from retail investors amounted to HK$487.4 billion, including HK$100 billion margin orders -- meaning the tranche was 270-times oversubscribed (before claw-back) and making the deal the third most popular Hong Kong IPO in terms of retail subscription in the past 10 years.
The huge orders will trigger a claw-back, capping the retail tranche at 20%, or 280 million shares, of the total deal.
“It’s very likely that the issuer will guarantee every subscribed retail investor at least one lot of the shares,” said another banker with direct knowledge of the deal. “It’s fair to all and can also add some secondary market stability,” said the banker.
Valuation
The final price of HK$24.8 represents a 2015 forecast price-to-book of 1.87 (1.8 times post-shoe) and translates to a discount of 35% to the price of A-shares, based on the last close of Rmb30.4 on Thursday.
The discount appears tight compared to the 48% discount to A-shares offered by GF Securities in a similar listing a month ago. GF is now trading on a 26% differential.
Citic Securities and Haitong Securities, the two largest Chinese brokers by assets, carry an H-share to A-share discount of 18% and 30%, respectively, as of Friday morning trading.
However, bankers on the deal are telling investors the valuation is reasonable. “They accept a post-show price-to-book ratio of 1.8 to 1.9 times; the IPO price is within their expectation,” said the second banker.
Huatai also derives market credibity by being the largest mainland broker by market share. The broker saw its share of the market grow from 7.9% in 2014 first three months of 2015 to 8.3%.
Huatai is in the process of transforming itself from a commission-based brokerage to a diversified financial services provider with a much more lucrative fee base. In particular, the company wants to build on its strong position as a domestic M&A advisor and number two in terms of assets under management within collective asset management schemes.
Pipeline
Huatai’s IPO looks certain to add momentum to upcoming equity transactions by Chinese brokerages.
Coming up in the pipeline, Guolian Securities plans to raise $400 million in Hong Kong, while Shenzhen-based China Merchants Securities is moving forward with a bid to raise around $300 million via an H-share float.
Guotai Junan Securities yesterday filed an application with the mainland securities watchdog China Securities Regulatory Commmission for a Shanghai listing of 1.5 billion A-shares. The issuer could raise $5 billion through the deal.
“China is opening up its financial market and we are standing at the most exciting moment in China’s financial reform process," said an investment banker with a global firm. "The brokerage sector will play an important role... and also be the foremost beneficiaries from it [ongoing reform process]".
Huatai Financial (Hong Kong), JP Morgan and UBS are joint sponsor and joint global co-ordinators of the deal. The other joint global co-ordinators are BNP Paribas, China Merchants Securities and ICBC International. The six are also joint bookrunners with ABC International, CCB International, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, GF Securities, Industrial Securities, Morgan Stanley and Nomura.
ABC International, BoCom International and Qilu Securities are working on the Guolian deal while China Galaxy Securities and Huarong Securities are sponsors on Guotai Junan’s transaction.
Additional reporting by Alison Tudor-Ackroyd
