China Galaxy Securities has become the second mainland brokerage to raise funds through Hong Kong’s private placement market, executing a HK$23.92 billion ($3.1 billion) deal on Monday.
The transaction represents Asia ex Japan’s fifth largest equity deal of the year.
And it appears to have been well timed, coming ahead of a long list of Chinese financial institutions all seeking to raise billions of dollars in equity financing to expand their businesses while markets are booming.
The brokerage has followed Haitong Securities lead by utilising a private placement structure that involves placing stock with a limited number of investors. Back in December, Haitong raised $3.9 billion from a deal that was placed with just seven investors.
China Galaxy’s two billion primary share offering was placed with 10 investors according to a source close to the transaction.
After quietly marketing the deal to a select group of accounts over the weekend, the lead management group priced the deal at HK$11.99 per share on Monday evening. This represented a 5.74% discount to the stock’s HK$12.72 close and equated to 26.53% of the group’s issued share capital.
Each investor purchased an average of 200 million shares, the source told FinanceAsia.
The majority of the order book comprised Chinese QDII holders and life insurers. It also encompassed two international funds and one large Hong Kong-family office.
Some of the investors already held shares in China Galaxy, although none were significant shareholders, the source added. The deal will settle on May 5.
A 5.74% discount seems relatively thin given the market risk the new investors are facing while they wait for the deal to settle. The stock’s short selling ratio immediately spiked to 38% after news of the deal became public.
It pushed China Galaxy’s share price down 2.99% to close at HK$12.34 on Tuesday.
However, the source noted there are a number of ways to hedge exposure to brokers, which are not only liquid, but have strong correlations to futures markets. The placement indicates investors still have confidence that the A-share and H-share rallies have legs he added.
Valuation linked to trading volumes
China Galaxy’s own stock market performance is very strongly correlated to rising markets given that a large chunk of its revenues are derived from brokerage. In 2014, this amounted to 50% of overall revenues, far higher than H-share listed competitors such as Citic Securities and Haitong Securities.
If markets continue to rise, then China Galaxy’s share price is likely to follow suit. Year-to-date it is up 26.8%.
At current levels, it is trading at 15.26 times consensus 2015 earnings, a discount to Citic and Haitong, which are respectively trading at 22.87 and 20.488 times.
And so far, the bull market remains in full swing. Hong Kong’s Hang Seng Index hit new seven-year highs on Tuesday, closing at 28,442.75.
The index is up 12.5% since April 2 and 20.5% year-to-date.
The Shanghai Stock Exchange Composite Index is also up 17.0% since April 2 and 38.4% year-to-date. However, it fell 1.13% on Tuesday after the China Securities Regulatory Commission warned novice retail investors to take heed of investment risk.
The regulator has been concerned about the experience of the large number of new investors entering the market. Some 4.2 million new retail brokerage accounts were opened in March and trading volumes have spiked dramatically.
Average Daily Turnover on the A-share market has been averaging Rmb1.3 trillion so far in April, up from Rmb950 billion in March and Rmb300 billion for the whole of 2014.
Rising trading volumes are particularly beneficial to China Galaxy, which says it will use 60% of proceeds to expand its margin financing and securities lending business. The remainder will be used for other capital-based intermediary and investment businesses, and working capital.
Its private placement brings the total Asia Pacific ex Japan ECM volume to $21.4 billion for the month of April, up slightly from $20.1 billion in April 2014, according to Dealogic.
The placement follows the successful H-share listing of GF Securities, which raised $4.1 billion from its initial public offering in late March. Both deals have benefited from a surge of trading volumes in Hong Kong where mainland investors have been keen to buy H-shares at attractive valuations relative to their A-share counterparts.
In March, the China Securities Regulatory Commission announced plans to allow Chinese mutual funds to purchase Hong Kong-listed shares through the Shanghai-Hong Kong Stock Connect programme.
GF Securities’ shares have jumped 31.3% since they began trading on April 9.
Long pipeline
Citic Securities also has shareholder permission to issue up to 1.5 billion shares through a private placement structure similar to Haitong and China Galaxy. At the current HK$34.1 share price, the deal could raise HK$51.22 billion ($6.6 billion).
Other financial institutions looking to come to market this year include Huatai Securities, Guolian Securities, Taikang Life, China Guangfa Bank and Huarong Asset Management.
Goldman Sachs, Nomura and China Galaxy International are joint global coordinators on China Galaxy’s deal. Placing agents comprise CICC, CMB International, ABC International, CCB International, China Securities International, CLSA and Haitong.
