China International Capital Corp, the country’s first joint venture investment bank, has reduced the size of its long-awaited Hong Kong initial public offering in the face of the bearish outlook towards the profitability of the Chinese brokerage sector.
One source close to the IPO told FinanceAsia that the original $1 billion fundraising target has now been scaled back to about $500 million to $800 million. This prospective 50% cut is the result of a more conservative valuation and a decision to raise less equity from what is largely a primary share deal.
CICC begins two days of pre-marketing today, Thursday. This accelerated schedule partly results from the fact that the group has already secured roughly $500 million in commitments from cornerstones investors, which means the deal is technically covered at the bottom end of the proceeds range.
“The initial fundraising target was fixed before the Chinese stock market rout in June,” the source commented. “Scaling back is a realistic move given the 40% decline in Chinese stock markets since then.”
Concerns about China’s slowing economy and the central bank’s aggressive move to depreciate the currency continue to weight on markets even though Shanghai and Hong Kong equity indices have been on a broadly rising trend since late September.
On Tuesday, the Shanghai Composite Index closed at 3,320, a 3.06% decline on the day and 39.6% decline from June’s seven-year high of 5,166. Over the same period the Shenzhen Composite has dropped 39.8%.
Falling markets and shrinking volumes have negatively impacted brokerage sector valuations.
Nanjing-based Huatai Securities, which raised $4.5 billion from Hong Kong’s largest IPO of the year, has seen its stock price plunge 29% since its debut in May. GF Securities, which closed at HK$15.68 on Tuesday, has also fallen 40.3% from its HK$26.30 June peak.
Notwithstanding falling share prices, one investor pointed out that it remains to be seen how much actual damage the market crash has on sector earnings since brokerages have yet to announce their quarterly or full year results.
CICC enjoyed a very strong first half. In the first six months of the year it underwrote Rmb84 billion ($13.2 billion) in equity offerings, some 71% of its 2014 total. That drove net profit to Rmb1.14 billion, a three-fold increase over the same period in 2014.
The main issue affecting it during the second half of the year will be the regulator’s decision to stop approving A-share market IPO applications in July. This means the investment bank will have to re-focus on sales and trading, plus wealth management.
Valuation
Prospective investors have been given mid point valuation guidance of roughly 1.2 times forecast 2015 book value. This is far lower than other Chinese brokerages achieved during the market’s bull run.
Huatai’s IPO was fixed at 1.87 times forecast 2015 price-to-book, while GF Securities was priced at 1.6 times book value. Jiangsu-based regional brokerage Guolian Securities also managed to price at 1.84 times book value when it listed in July.
Today Huatai, GF and Guolian are respectively trading at 1.32 times, 1.33 times and 1.08 times forecast 2015 book value.
One advantage CICC has over other Chinese brokerages is its ability to transcend domestic investment banking. The group has a multinational shareholder base including Singapore’s sovereign fund GIC, American private equity firms KKR and TPG, plus Singapore insurance giant Great Eastern Life Assurance.
CICC’s international operations accounted for 27.9% of its income last year, but this was mainly derived from its business in Hong Kong. The investment bank’s offices in London, New York and Singapore have yet to provide any significant contribution to the bottom line.
To this end, a portion of CICC’s IPO proceeds will be used to develop its international business and increase its cross-border trading and sales capabilities, the investment bank said in its preliminary prospectus. A further portion will also be used for equity sales and trading, wealth and investment management business, as well as for general corporate purposes.
The Institutional bookbuild and management roadshow is set to start on October 26, with pricing scheduled for October 30. The company is set to start trading on November 9.
CICC and ABC International are joint sponsors.
