Shenwan Hongyuan Group launched on Thursday what is set to be the largest initial public offering in Hong Kong so far this year as the Shanghai-based brokerage seeks as much as HK$9.8 billion ($1.25 billion) to belatedly catch up with its bigger rivals.
The deeply-discounted transaction promises to give the Hong Kong primary market a boost after a lacklustre first quarter in first-time share sales. Although the total volume of IPO fundraising was only down 7% on the first three months of last year, the city failed to attract any deals worth more than $400 million for the first time in a decade.
A Hong Kong listing has been on the cards ever since the company, which is already listed in Shenzhen, was formed through a $6.4 billion merger between Shenyin & Wanguo Securities and Hongyuan Securities in 2015.
However, the firm failed to catch the window between 2016 and 2017 when a number of Chinese brokerage houses, including Guotai Junan Securities, China Merchants Securities, Everbright Securities and Orient Securities, all sold H-shares in Hong Kong.
Still, Shenwan Hongyuan may be better off now by launching the share sale just ahead of the proposed new Shanghai technology innovation board, which is scheduled for take off in the autumn. This new Nasdaq-style startup board is designed for fast-growing companies to raise capital without having to adhere to the complex rules and financial requirements of the main board.
In its preliminary prospectus, Shenwan Hongyuan said it is well-positioned to benefit from the launch of the new board due to its focus on emerging enterprises.
The Shanghai Stock Exchange is in the process of reviewing the first listing applications, and the first IPO on the new board is expected to complete in October.
Besides its investment banking and brokerage operations, Shenwan Hongyuan is also well-known for its equity research business conducted through its subsidiary SWS Research. The Shenzhen Stock Exchange uses the brokerage’s Shenwan Industry Index as a reference tool in its risk supervision system.
As of the end of last year, Shenwan Hongyuan was China’s seventh-largest brokerage by net assets behind Citic Securities, Guotai Junan Securities, Haitong Securities, Huatai Securities, GF Securities and China Merchants Securities. Data from the China Securities Regulatory Commission also shows Shenwan Hongyuan was the fifth-biggest by operating revenue last year.
The Shanghai-based firm will be the last of China's top-seven brokerage houses to list its shares on both the mainland and Hong Kong stock markets. As such, the H-share offering is seen as a crucial step for Shenwan Hongyuan to catch up with bigger rivals, both in terms of funding and market exposure.
VALUATION
The biggest selling point of Shenwan Hongyuan’s H-share offering is the relatively steep discount offered against its mainland-traded shares.
Shenwan Hongyuan’s 2.5 billion-share deal is being marked at HK$3.63 to HK$3.93 per share, implying a discount of 41% to 45% to the company’s Rmb5.66 Wednesday close in Shenzhen.
At the lowest end of the price range, Shenwan Hongyuan will be the second-cheapest stock among the top-seven brokerages compared to their A-shares, trailing only China Merchants Securities with a 45.5% A-H discount.
The deal is being offered at 1.01 times to 1.08 times its 2018 book value and 0.92 times to 0.99 times its forecast book valuation for this year. On a historical basis, it is fairly priced compared with its six peers, which are trading at between 0.86 times to 1.27 times their respective book values last year.
In any case, the deal will require at most $425 million of orders from public investors since $829 million-worth of shares have already been allocated to 13 cornerstone investors. The cornerstone tranche is relatively chunky – accounting for 66.2% to 71.6% of the total deal size on a pre-greenshoe basis.
The cornerstone investors are ICBC Asset Management Scheme Nominee ($300 million), Huaxia Life Insurance ($100 million), China Life Insurance ($80 million), China Reinsurance ($50 million), New China Life Insurance ($50 million), State-Owned Enterprise Structural Adjustment China Merchants Buyout Fund ($50 million), Suning International ($50 million), Sichuan Development ($49 million), Taiping Life Insurance ($30 million), China Saite (H.K.) Company ($30 million), Changjiang Pension Insurance ($20 million), Pacific Asset Management ($10 million) and PICC ($10 million).
Shenwan Hongyuan’s H-shares will account for 10% of the enlarged share capital pre-greenshoe and 11.33% post-shoe. The deal has a 94%/6% split between institutional and retail investors subject to clawback.
Pricing for the IPO is scheduled for April 18 and listing is set for April 26.
Joint sponsors of the IPO are Shenwan Hongyuan (HK), Goldman Sachs, ICBC International and ABC International. Joint global coordinators are Citigroup and Credit Suisse.
