Citic Securities is the latest mainland brokerage to launch a Hong Kong offering, amid rising volatility and increasingly skittish investors.
The broker, which is scheduled to make its offering available to the public today, is seeking up to HK$15 billion from a Hong Kong listing to fund expansion in international markets.
The company is offering 995.3 million shares at an indicative price range of HK$12.84 to HK$15.20 each, putting the total deal size as high as HK$15.13 billion and making it one of the largest initial public offerings this year in Hong Kong.
Mainland insurers, brokerages and banks - including Citic Securities, Haitong Securities and New China Life - have recently unveiled plans to raise a combined US$35.4 billion from listings in Hong Kong and on the mainland.
But IPOs have been hit by poor sentiment emanating from the weak outlook for global economic growth. The Hang Seng Index has lost 15.39 per cent since the beginning of August on concerns over a double-dip recession and sovereign debt woes in the euro zone.
Two heavy equipment makers, Sany Heavy and XCMG Construction Machinery Co, have just postponed plans to raise a combined US$5 billion in Hong Kong.
'I wouldn't say it's impossible to sell a company now,' said an investment banker advising on IPOs who did not want to be named. 'Investors are more selective and there will be pressure to sell the shares at a discount. You can wait [until the market condition improves] but you won't know when. Most likely you have to pay a price for waiting.'
Despite being the mainland's largest publicly traded brokerage, brokers expect a weak reception from retail investors for Citic Securities.
Typically an IPO allocates about 90 per cent of the shares to international investors, leaving 10 per cent to the public.
Hong Kong regulators ask for 10 per cent of an IPO to be set aside for the public, but the company can apply for a waiver to cut that amount when there is sufficient demand from institutional investors such as long-only funds, hedge funds or pension funds.
Citic Securities has already secured a total of US$850 million from six cornerstone investors - Temasek Holdings, Kuwait Investment Authority, asset manager Waddell & Reed, Fubon Life Insurance; Brazilian investment bank BTG Pactual; and US-based hedge fund Och-Ziff Capital Management.
These cornerstone investors will have their stakes locked-up for six months from the listing date.
According to a term sheet sent to investors, the mainland broker will offer 95 per cent of the shares sold in the IPO to institutional investors, leaving just 5 per cent to the public.
There's a clawback option which can boost the retail portion to 7.5 per cent.
Brokers believe without the significant uptake promised by institutional investors Citic Securities might struggle with the share sale.
'Market conditions are bad,' said Mark To, head of research at Wing Fung Financial Group. 'There are so many cheap stocks in the market with track records and I doubt this offering will get much attention. Right now, investors are not thinking about fundamentals.'
Some analysts are sceptical about the future growth of Citic Securities, which counts investment banking, trading, asset management and brokerage as its main revenue drivers.
Commission rates among mainland brokers have declined in recent years due to intense competition and their heavy reliance on the retail market.
To diversify from the mainland's fickle retail market, large mainland brokers such as Citic and rival Haitong Securities are trying to raise their profiles with planned listings in Hong Kong, riding the mainland's rapid economic growth and its attempts to 'internationalise' the yuan.
In another attempt to boost its profile and business, Citic said in June that it had bought a 19.9 per cent stake each in CLSA and Credit Agricole Cheuvreux from French investment bank Credit Agricole.
According to a pre-listing document, sales, trading and brokerage operations constituted about 53.7 per cent of Citic Securities's total revenue for the year ended December 2010, down from 71.5 per cent for 2009. Revenue from sales, trading and brokerage operations dropped to 16.27 billion yuan, down 4.6 per cent from the previous year's 17.06 billion yuan.
Income from commission and fees plummeted 8.5 per cent for the year ended 2010 to 16.6 billion yuan from 2009's 18.15 billion yuan.
'Mainland brokers' revenue tends to be closely correlated with stock market turnover,' said Kenny Tang Sing-hing, of AMTD Financial Planning. 'Mainland securities have underperformed this year and brokers' revenue will be affected.'
Citic reported a 20 per cent increase in net profits for 2010 to 12.14 billion yuan from 2009's 10.09 billon yuan.
The share of its IPO that Citic Securities has said it will use to 'establish or acquire' overseas research desks and sales networks