Citic Securities will issue new H-shares to China’s National Council for Social Security Fund and raise HK$11.52 billion ($1.49 billion).
Some 640 million shares will be offered at HK$18 per unit, according to a filing on the Hong Kong Stock Exchange website. This is a 43% discount to the broker’s June 8 closing price of HK$31.65.
The shares on offer represent 54.3% of the total issued H-shares as of June 9, and 5.8% of the broker’s total issued share capital.
The H-share issuance is part of a three-year strategic cooperation framework between Citic and China’s social security fund. The framework will allow the NSSF to choose which of Citic’s services it uses, such as domestic and overseas investments, asset management, management of domestic and overseas stocks, block trades, securities lending and asset securitisation.
NSSF will own a 5.02% stake in Citic upon completion of the deal. There is a three-year lockup in place. Seventy percent of the proceeds will be used for developing Citic’s margin financing and securities lending business. Some 20% meanwhile will be used for cross-border business development and platform building, while the remainder will be used for working capital.
Citic initially announced plans last December to raise $4.5 billion by offering 1.5 billion new shares to 10 investors, an effort to fund its rapidly expanding margin financing business.
But in its June 8 filing, Citic said the December placement has been downsized from 1.5 billion shares to 1.1 billion shares. NSSF will purchase 640 million of the 1.1 billion shares on offer.
Jefferies analysts argue that the downsized deal from December will offer a dilution of 13.6% of 2015 p/e compared with 12% previously, and argues that the impact of downsizing the shares will be limited. “We believe the cooperation is positive for Citic’s business and will help promote its brand,” Jefferies analysts said in a June 9 report.
Jefferies forecasts Citic has an estimated 2015 earnings of 20.1 times, with a price-to-book ratio of 3.11 times. Citic’s H-shares are currently trading at 15.9 times 2015 earnings, or 2.46 times p/b.
BOC International is equally bullish on the mainland broker, arguing there will be more synergies between Citic’s traditional franchises and subsidiaries in coming months. This will be “the key competitive edge for Citic to fortify its leading position in China, especially amid a changing business environment for brokers, including the escalating brokerage commission rate war, rising connectivity of mainland and Hong Kong stock markets, IPO registration reform and global expansion of Chinese enterprises,” read the May 19 BOC International report.
In addition to the traditional brokerage lines, such as ECM, DCM, proprietary trading and asset management, Citic through its subsidiaries manages private equity funds, direct investment portfolios and public fund management businesses.
Citic’s margin financing business underperformed in April, mainly due to a three-month suspension of credit account openings since January. But BOC International expects it will recover lost market share later on, as the CSRC-imposed penalty ended in April. “Citic should also enjoy higher interest spread and larger growth in margin financing, given its better debt funding channels than peers,” BOC International added.
Brokerages have been seeking to raise capital in equity capital markets amid soaring stocks in Hong Kong and China.
Huatai Securities, China’s largest broker by trading volume, raised $4.5 billion in its Hong Kong listing in May, a tremendously popular deal that triggered demand from 800 institutional investors. Retail investors piled in as well, with this tranche oversubscribed by 270 times.
GF Securities meanwhile raised $4.1 billion in its Hong Kong listing post-greenshoe in March, while Haitong Securities’ raised $3.9 billion in a private placement late last year.
Barring a major collapse in stock markets, analysts remain optimistic about the outlook for other mainland brokers. Both Guolian Securities and China Merchants Securities have H-share listings planned, while Guotai Junan Securities is looking to float 1.5 billion A-shares.
The rallying stock markets have boosted brokerage activity. In April, average daily turnover totalled Rmb1.4 trillion ($225.5 billion), according to BOC International, and the research house is forecasting full year average daily turnover of Rmb834 billion.
The turnover explosion was driven by retail investors eager to participate in the stock market rally. The number of new brokerage account openings reached 13.6 million in April, exceeding the previous peak of 5.1 million in June 2007. (This spike is at least partially due to the new multiple brokerage account rule, which allows retail investors to have up to 20 brokerage accounts open.)
Stock markets hit seven years high in April, following news that Chinese mutual funds will be allowed to participate in the Shanghai-Hong Kong Stock Connect programme. Rather than valuations, however, local markets are being driven by Chinese retail investors and policy easing, as evidenced by recent volatility.
After hitting a new seven-year high on April 28, Hong Kong’s Hang Seng Index has dropped 5% up to June 9.
