China's second most profitable brokerage company launched its Hong Kong initial public offering on Monday at a valuation, which should ensure secondary market performance if markets hold steady until the deal is priced on Friday.
Guotai Junan's IPO breaks with recent tradition and has been structured as a fixed-price offering at HK$15.84 per share, to raise HK$16.47 billion ($2.12 billion) pre-greenshoe. This makes the valuation work relatively easy for investors, given the group is already listed in Shanghai.
Its international arm is also listed in Hong Kong similar to Haitong Securities, which it leapfrogged in 2016 to become China's second most profitable broker.
The deal will be the biggest flotation in the Hong Kong market since that of Postal Bank of China in September.
Valuation
The deal’s biggest selling point is its valuation at 1.08 times consensus forecast price to 2017 book. This pitches Guotai Junan at a 12.2% discount to the 1.23 times consensus H-share price to 2017 forecast book valuation for its nearest three comparables, Citic Securities (1.2 times), Haitong Securities (1.2 times) and GF Securities (1.3 times).
Even if outlier, Huatai Securities (1.12 times) is thrown into the mix, the discount is still a healthy 10.4%.
Unsurprisingly, this discount combined with financial metrics, which place Guotai Junan above its peers, means the deal is already drawing strong demand. As one banker commented: "Books are already covered and we're seeing good demand from both Chinese and international investors."
The deal should also have fairly decent liquidity, since the cornerstone tranche will only account for 28.2% of the deal, far lower than most recent Hong Kong IPOs.
A turnaround in the sector’s performance may provide a further tailwind for the deal, although average daily turnover in China is still trailing 2016 levels.
Analysts say the brokerage sector is trading below its five-year forward H-share price-to-book average of 1.38 times and has yet to benefit from the momentum, which has propelled the Hong Kong and mainland stock markets over the first quarter of 2017.
The sector has underperformed both the Hang Seng China Enterprises Index, up 10.29% year-to-date and the Hang Seng H-share financials index, up 8.94% over the same period.
H/A discount
So far this year, there has also been a marked difference between the A and H share performance of China's biggest brokers.
For example, Citic Securities, the country's largest broker by assets and profitability, has performed in both markets. Year to date, it is up 5.08% in Hong Kong and 1.25% in Shanghai.
GF Securities has also risen in both markets, up 2.84% in Hong Kong and 2.37% in Shanghai.
As a result, both Citic and GF Securities are trading at a tighter H/A discount than their peers, with Citic at a 10.95% discount in Hong Kong and GF at a 17.21% discount.
Haitong and Huatai, on the other hand, have performed less well and are trading at wider discounts. The former is up 3.01% in Hong Kong, but down 5.08% in Shanghai equating to a 23.31% H/A discount, while the latter is up 3.92% in Hong Kong, but down 4.7% in Shanghai, or a 25% discount.
Guotai Junan is being marketed at a 25% discount to its A-shares according to syndicate bankers.
On a price-to-forward-book basis, it is being pitched at a 21.2% discount to its 1.37 trading level in Shanghai. Here it ranks third behind Haitong (1.57 times) and GF (1.5 times) and above Citic (1.27 times).
One key issue for investors will be the extent to which earnings have bottomed. Analysts forecast that Guotai Junan’s net profit will increase 14.5% from Rmb9,841 billion in 2016 to Rmb11.5 billion in 2017.
They also expect a far stronger regulatory backdrop in 2017, which may finally draw a line under 2015’s disastrous stock market crash. New asset management guidelines are being drafted and April should see the submission of a revised securities law.
Indeed, Guotai Junan's own domestic IPO came just as the markets were turning in June 2015, raising Rmb30.05 billion ($4.8 billion). Since then, the stock has held up relatively well compared to the market's overall gyrations, falling 14.3% from its Rmb19.71 IPO price to a trough price of Rmb18.71 in February 2016.
On Monday, the stock closed at Rmb18.88 in Shanghai, up 1.56% year-to-date and 0.38% on a one-year basis.
Bankers say one reason for its relative strength is Guotai Junan’s technology platform. “This is one aspect the Hong Kong IPO investors are focusing on,” one banker commented. “Guotai Junan looks far more like a Western securities house than some of its peers and is very keen on big data analytics.
“These data mining abilities inform the group’s future strategy,” the banker continued. “They also underpin its risk management.”
Rating agency Standard & Poor’s has also made frequent note of Guotai Junan’s risk management capabilities, concluding that its counter-cyclical approach meant it was well ahead of the market in moderating the fall out of the 2015 crash.
Other deal terms
Pricing for the IPO is scheduled for Friday and has a basic 95%/5% split between institutional and retail investors.
The first clawback to a 7.5% retail allocation is triggered if the deal is more than 15 times oversubscribed, then to 10% if it is more than 50 times oversubscribed.
There are six cornerstone investors taking a combined $598 million: Diamond Acquisition SARL on $388 million, Da Cheng International $10 million, Bocom International Global Investment $80 million, Winland Foundation $100 million, ICBC Private Banking Global Investment Fund $10 million and Tokai Tokyo Securities $10 million.
Post greenshoe, the company will raise HK$18.94 billion ($2.44 billion), with the H-shares accounting for 13.56% of the enlarged share capital.
Listing is scheduled for April 11.
Joint sponsors are Guotai Junan International, Bank of America Merrill Lynch, Goldman Sachs and Shanghai Pudong Development Bank international.
