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China Merchants Securities priced Hong Kong's third largest initial public offering of the year on Friday, raising HK$10.7 billion ($1.38 billion) from a deal, which priced just below the mid-point of its indicative range at HK$12 per share.
The 891.27 million share deal (pre-greenshoe) priced 37.5% through its HK$11.54 to HK$12.78 range.
This is a higher level than Orient Securities, which came 20% through in late June, but far less aggressive than Everbright Securities, which came 60.5% through in mid-August. The latter has paid the price for egging the mix since then, trading down 9% from its HK$12.68 issue price to HK$11.54 at Friday's close.
By contrast, syndicate bankers said that China Merchants opted to "leave something on the table for investors" in deference to difficult market conditions and negative sentiment towards the Chinese brokerage sector.
Hong Kong-listed Chinese brokerage stocks have been on a uniformly downward trend since September 9.
China Merchants also priced on a volatile day for the overall Hong Kong stock market, with the Hang Seng China Enterprises Index closing down 2.17% on Friday. This represented the index's lowest level in three weeks as global investors fretted whether Deutsche Bank was about to provide global markets with another Lehman moment.
Bankers said most of the price sensitivity in the institutional order book had been focused at the mid-point, with the syndicate adopting a fairly diversified allocation strategy. "There was a heavy cornerstone element to this deal so the rest of the institutional book was widely distributed across funds, corporates and private banking accounts," said one syndicate banker.
The institutional book was several times covered according to syndicate bankers, with 11 cornerstones taking 60.78% of the overall deal, pre-greenshoe.
Bankers said fund managers like China Merchants because it has a strong brand name and is less focused on margin trading and other forms of leveraged business than some of its peers. It has, for example, a much stronger investment banking footprint and prime broking and private banking business.
Its well-established international brand name (in Hong Kong at least) also appears to have played fairly well with retail investors. The retail component, accounting for 5% of the deal, closed five times covered according to bankers.
This means China Merchants has done far better than Orient Securities, which was undersubscribed and Everbright, which was 1.68 times covered.
It has also done better than Hong Kong's two biggest IPOs of the year. Postal Bank of China had a 2.6 times retail oversubscription ratio for its $7.48 billion IPO in September, while China Zheshang Bank’s in March was undersubscribed.
At HK$12 per share, China Merchants Securities has priced at 1.375 times forward book value, a 27.7% discount to the 1.9 times valuation of its Shanghai-listed shares.
Year-to-date, its domestic shares are down 20.78%, although they have enjoyed a bounce over the past two trading days.
On the domestic stock market, China Merchants Securities commands one of the highest multiples among its listed peers. Huatai Securities, for example, is trading around 1.5 times forward book in Shanghai, while Haitong is at 1.64 times and Everbright at 1.49 times.
IPO investors will be hoping China Merchants Securities can trade at a much closer H/A discount like Huatai, whose H shares are trading at 1.3 times forward book - a 13.34% discount to the brokerage’s A-share valuation.
Trading will begin on Friday October 7, another reason for the leads to adopt a slightly more defensive pricing stance since Chinese investors will still be on holiday, potentially dampening liquidity support for the deal.
Joint sponsors for the IPO are JP Morgan and Morgan Stanley with Huatai Financial and China Merchants Bank International joining them as joint global co-ordinators.
Joint bookrunners are: Deutsche Bank, Mizuho, GF Securities, EBS International, Orient Securities, China Securities, Guotai Junan Securities, Ping An Securities, UBS, ICBC International, ABC International, CCB International, Bocom International and Bank of China International.
