Guotai Junan Securities launched the world’s largest initial public offering of the year on Wednesday after setting the price for its Rmb30.1 billion ($4.83 billion) Shanghai listing at Rmb19.71 per share.
The flotation is a monster even by Chinese standards. It not only represents the country’s largest IPO in five years, but is also expected to help tie up as much as Rmb6.68 trillion in domestic liquidity as investors fight for the new batch of 25 A-share companies coming to market over the next five days.
However, analysts believe the deal will be a great success unless the A-share market’s current bull run comes to a juddering halt since it has been pitched at a big discount to fair value estimates.
The pricing level, which has been well flagged for some time, values China’s third largest brokerage by assets at 22.99 times 2014 earnings, just shy of the regulator’s unofficial ceiling of 23 times.
On a 2015 basis, however, Guotai Junan looks much cheaper based on earnings per share (EPS) estimates from Wind Information’s database. This reveals a consensus EPS estimate of Rmb2.14 per share, equating to an IPO valuation of 9.2 times 2015 earnings.
GF Securities, for example, values Guotai Junan at Rmb2.08 per share. This puts fair value at Rmb42.39 per share, or 20 times 2015 earnings and indicates 115% upside from the IPO price.
The trading level of the group’s Hong Kong listed subsidiary also underscores the likelihood that the stock will soar in the secondary market. Guotai Junan International closed Wednesday at HK$15.40, valuing the stock at 37.23 times 2014 earnings and 23.6 times 2015 earnings.
The H-shares have been on a rising trend since last Wednesday, outperforming the overall market and jumping 13%. This Wednesday, they closed up 2.94%.
Bloomberg data shows that fellow comparables Huatai Securities and Citic Securities are trading at respective p/e multiples of 29.31 times and 24.81 times 2014 earnings in Shanghai. In Hong Kong they are valued at 19.25 times and 18.47 times 2014 earnings. Their current trading level suggests the parent’s A-shares have immediate upside of 50% to 60% in order to reach the same level as the H-shares. This also takes no account of the fact that the A-shares of all the Chinese brokerages are trading at a premium to their H-share counterparts.
According to its filing, Guotai Junan is selling 1.525 billion shares, constituting 20% of its enlarged share capital. It plans to sell 70% to institutional investors and 30% to retail investors.
The institutional book opened on Wednesday and runs through to Thursday, while the retail offering kicks off on Thursday.
One key issue will be how the secondary market performs. On Wednesday, the Shanghai Composite Index closed up 1.65% after a torrid few days when brokers speculated the government would try to intervene and dampen valuations.
However, Xun Yugen, equity analyst at Haitong Securities, believes any tightening measures will be modest and not lead to a crash. In a research note published on Monday he says that investors, “Will encounter some ups and downs in any round of the bull market.”
“It’s hard to stop a growing amount of capital from flowing into the market, because the Chinese people are very keen to re-distribute their wealth [to better investments],” he added.
One of the reasons Guotai Junan has been favoured by analysts is because it is highly profitable. In 2014 it reported net profits of Rmb7.17 billion, just shy of the Rmb7.7 billion recorded by Haitong Securities.
This profitability is the result of its focus on high net worth individuals and its well-regarded online trading platform.
Once the firm is listed it will have a market capitalization of Rmb150 billion ($24.16 billion).
Its deal will just pip Huatai Securities, which raised $4.478 billion from a Hong Kong IPO in late May and GF Securities, which raised $4.137 billion in March. Together they represent three out of the four largest IPOs of the year according to Dealogic figures.
Joint sponsors for Guotai Junan’s IPO are China Galaxy Securities and Huarong Securities. Joint underwriters are Ping An Securities, Huatai United Securities and Southwest Securities.
