The Shanghai Stock Exchange marked a day of high drama on Tuesday as the country’s largest flotation in five years – that of Guotai Junan – wrapped up allocations against a backdrop of wild swings in the benchmark stock index.
As investors returned from the Dragon Boat Festival public holiday, it initially looked like the equities market was heading for a further rout. The Shanghai Composite index plunged 4.8% during the morning session before staging a sharp V-shape re-bound, which saw the index bounce back 7.31% during the afternoon session to close up 2.19% on the day.
Sentiment was boosted by rumours that the Chinese Securities Regulatory Commission (CSRC) would slow down the procession of IPOs, allied with the prospects for further SOE reform and the potential launch of a Shenzhen-Hong Kong Stock Connect Scheme before year-end.
The demand generated by Guotai Junan’s initial public offering may help to bolster this further on Wednesday. China’s third-largest stock brokerage by assets announced on Tuesday it had raised Rmb30 billion ($4.83 billion) from its Shanghai initial public offering.
The deal had frozen up Rmb2.35 trillion of capital during its subscription period and triggered strong demand from both institutional and retail investors.
The institutional book closed 48 times oversubscribed, attracting participation from 77 accounts across the country, according to a statement posted on the Shanghai Stock Exchange website. In terms of allocations, mutual funds received 54.52%, insurance companies 26.74% and corporate self-operating investment accounts 18.74%.
It also said that state-owned China Life Insurance Group subscribed to about Rmb560 million of the deal, while the Beijing-based Anbang Insurance Group subscribed to about Rmb380 million.
The retail tranche closed 148 times covered, triggering the clawback mechanism, which boosted the retail allocation from 30% to 70%. The original split between the institutional and retail tranches had been 70% and 30%.
In total, the Shanghai-based broker sold 1.525 billion new shares, or 20% of its enlarged share capital at Rmb19.71 per share.
Bull or bear?
Key will be whether the Chinese stock markets can continue to recover from last week’s losses, the worst since the 2008 global financial crisis. The Shanghai Composite Index alone plunged 13.3%, while the Shenzhen Composite fell 12.7%.
The sharp downturn raised concerns that China’s year-long stock rally may be running out of steam.
However, Steven Sun, head of Hong Kong and China equity research at HSBC, believes a collapse is unlikely. He thinks Beijing will keep supporting the bull-run, while clamping down on brokers’ record margin lending volumes, an increasing worry for Chinese regulators.
“The A-share market correction is likely to continue in the short term as the leverage – or liquidity-driven beta rally could be over,” Sun wrote in a research note published on Tuesday.
“It would be premature to call an end to this rally, given the importance of the stock market to helping China’s SOEs and key industries obtain much-needed financing, and the likelihood of more monetary easing,” he added.
Notwithstanding the recent volatility, many equity analysts and traders believe Guotai Junan’s IPO will perform well in the secondary market because it has been pitched at a big discount to fair value estimates.
GF Securities, for example, puts fair value at Rmb42.39 per share, or 20 times 2015 earnings, and indicates 115% upside from the IPO price.
“Guotai Junan’s stock will probably hit its 10% daily limit for a few days after listing,” said one Shanghai-based equity trader. “New stocks can surge even in a bear market.”
“The company is still much cheaper than its peers,” the trader added. “Big market swings will only make investors more keen on cheaper shares.”
Guotai Junan is expected to list on Friday, according to one source close to the deal.
Joint sponsors for the IPO are China Galaxy Securities and Huarong Securities. Joint underwriters are Ping An Securities, Huatai United Securities and Southwest Securities.
Pipeline
Other Chinese brokers are still eagerly queuing up to tap the equity markets to replenish funds for expansion.
Coming up through the pipeline are two medium-sized Chinese brokerages, according to their updated preliminary prospectuses filed with the CSRC last Friday.
Chengdu-based Huaxi Securities plans to sell up to 700 million shares, or up to 25% of its enlarged stock capital, while Dongguan Securities, based in the southern city of Dongguan, one of the world’s largest manufacturing powerhouses, aims to issue up to 166.67 million shares, or up to 10% of its enlarged equity.
Both brokers hope to list in Shenzhen once they get the green light from the CSRC.
