Huatai launches ambitious deal in exhausted A-share market

Huatai Securities, a leading brokerage in China, started bookbuilding yesterday with the aim of raising up to Rmb17.26 billion ($2.5 billion) from an initial public offering (IPO) in Shanghai, which, if successful, will be the largest new share sale in China so far this year.

The largest deal at the moment is last week's IPO for China First Heavy, which failed to raise the maximum amount sought as new mainland offerings have met with an increasingly tepid response from the market. According to market watchers, this is because issuers are setting fundraising targets that are too ambitious amid the current weak market demand for new shares.

Huatai won't be able to reap its targeted amount in full either, analysts say, even though the deal has been downsized from the Rmb20 billion ($2.9 billion) that the company initially planned to raise.

Nanjing-based Huatai is offering 784.6 million new shares at between Rmb20 and Rmb22 apiece, which values the company at 29.4 to 32.4 times its projected net earnings for 2009. By comparison, Huatai's domestic competitors, Shanghai-listed Everbright Securities and China Merchants Securities, are currently trading at 2009 price-to-earnings multiples of 34.4 and 34.0 respectively, according to Bloomberg.

"The (offering) price is not ideal for Huatai, but it's reasonable considering the weak market," said Liu Jun, an analyst at Changjiang Securities. "The final price will be below the top end (of the indicated range)."

The total share offering accounts for 14% of Huatai's share capital, with 30% of the shares earmarked for institutional investors and the remainder open to all investors, Huatai said in a filing to the Shanghai Stock Exchange yesterday.

Huatai is the third brokerage to list in Shanghai since last August, and Shenzhen-based Guosen Securities is likely to be next to float shares on the city's bourse, Changjiang's Liu predicts. There are over a hundred securities firms in China, most of which operate in the bigger cities.

Last November, China Merchants Securities raised Rmb11.1 billion ($1.62 billion) by selling 358.5 million shares, or 10% of its enlarged share capital, at the top end of the indicated range. However, the trading debut, which saw the share price gain 8.4%, was the weakest opening by a Shanghai IPO in three years, as the IPO price of Rmb31 per share -- representing a 2008 P/E ratio of 56 times -- gave little room for the share price to increase further.

Three months before that, Everbright Securities went public in Shanghai and raised Rmb11 billion ($1.6 billion) by selling 520 million shares, or 15.2% of its share capital, at 59 times its 2008 earnings. The share price rose 30% on the first trading day, but analysts and media still described the debut as "weak" since seven new stocks prior to Everbright Securities' listing had surged more than 100%.

In 2009, all 117 companies that went public in mainland China sold shares at the top end of their price ranges, and none fell on debut, according to Bloomberg data.

That's a sharp contrast to the Shanghai IPO market this year, which has seen companies fall below their IPO prices on the first trading day or fail to raise the maximum amount. China XD Electric and China Erzhong Group Deyang Heavy Industries were the first two companies to fall in their Shanghai debuts in more than five years. Meanwhile, China First Heavy raised $1.67 billion from its IPO, compared with an initial aim for $1.7 billion.

China's securities regulators have been increasing the equity supply in the country's stock markets by approving more listings, thus hoping to curb soaring asset prices. However, too many companies are racing to issue at high offering prices and high valuations, and their desire to raise a massive amount of capital is drying up investor appetite for new equities, said observers.

A total of 21 new stocks listed in the A-share market in the first two weeks this year, according to statistics from Shanghai Stock Exchange, making this the busiest January in terms of fundraisings on record.

Huatai plans to use the net proceeds from the share sale to boost its asset management business and to prepare for stock index futures and margin trading, it said in the listing prospectus. The brokerage made a $4.5 billion net profit during the first nine months of 2009.

Haitong Securities is managing the deal.