China Securities launched a HK$8.2 billion ($1.06 billion) initial public offering on Monday, setting aggressive terms in the hope the imminent launch of a stock trading link between Hong Kong and Shenzhen will give it momentum.
After a week of premarketing, the Reg S/144A deal launched on the first trading day after the China Securities Regulatory Commission's announcement late on Friday that the stock connect would commence on December 5.
Chinese brokerage houses are seen as the biggest winners from a tie-up between the two exchanges, which have 1,300 listed stocks between them. They are anticipating a big increase in demand for margin financing and securities lending.
The IPO is also being launched as Hong Kong stocks gradually recover from a three-month low in mid-November, with the Hang Seng Index up 3.2% since then.
China Securities hopes these tailwinds will support the heady valuation it is pitching to investors.
According to syndicate bankers, the 1.13 billion-share deal is being marketed at HK$6.36 to HK$7.26 per share, or 1.12 times to 1.25 times the firm’s estimated book value as of the end of this year on a pre-shoe basis.
Even at the cheapest end of the range, China Securities would command a valuation premium of about 10% over the H-shares of Everbright Securities and Orient Securities, both of which trade near their projected 2016 book values.
Everbright Securities and Orient Securities are seen as the closest comparable stocks to China Securities because they are similar in terms of business scale and asset size. According to the Securities Association of China, Everbright, Orient and China Securities respectively ranked 10th, 11th and 14th by net assets among all Chinese brokerage firms.
China Securities has secured 10 cornerstone investors who will take about 60% of shares offered in the IPO.
The largest of the group is Citic Securities, which has agreed to buy 352 million shares at the final offer price. It was already China Securities’ third largest shareholder with a 7% stake before the IPO, and will increase its stake to 10.8% after the listing.
The other nine cornerstones are Structural Reform Fund ($100 million), Taiping Life Insurance ($50 million), Daiwa Securities ($20 million), China Huadian ($20 million), Shunlong Fund ($20 million), Beijing Xianglong Assets Management ($20 million), Beijing Urban Construction ($20 million), Beijing Capital Development Asset Management ($20 million) and Guangdong Province Railway Development Fund ($20 million).
It is worth noting China Securities has applied to list under the name CSC Financial. That should avoid confusion with another mainland brokerage firm, China Investment Securities.
Pricing of the IPO, which will have a 91.5%/8.5% split between institutional and retail investors before any clawback, is scheduled for December 3. It is expected to list on December 9.
China Securities International, UBS and ABC International are joint sponsors of the IPO.
