Across The Border

Mainland brokerages missed the best of times for Hong Kong IPOs

Three lined up for share sales in Hong Kong may face lukewarm investors and pricing pressure.

PUBLISHED : Friday, 27 May, 2016, 1:38pm
UPDATED : Friday, 27 May, 2016, 1:38pm

The best time may have passed for mainland securities companies to launch initial public offerings (IPOs) and be listed on the Hong Kong stock exchange.

Three Shanghai-listed brokerage houses are in the pipeline to sell their H Shares to investors in the city in 2016, including Everbright Securities, China Merchants Securities and DFZQ.

China Merchants Securities, the country’s sixth largest broker by total assets in 2014, has cut its fundraising expectations over a half from a previous target of US$4 billion to US$5 billion, the Wall Street Journal reported. The firm filed in mid May for a Hong Kong listing and did not give a figure for how much it expected to raise.

Public share offerings by securities firms are unlikely to be red hot, given the current sluggish market sentiment. And it’s that investor feeling that matters most, Jojo Choy, vice chairman at the Institute of Securities Dealers in Hong Kong, said. It was what benefitted GF Securities and HTSC who issued H shares when Chinese stock markets were at the peak, he said.

HTSC, China’s fifth largest broker listed in early June, 2015. It was the biggest IPO of that year and raised HK$38.8 billion. The shares were oversubscribed 278 times in their retail tranche.

GF Securities, the fourth largest domestic broker, listed in April last year and raised HK$32.1 billion by setting an offer price of HK$18.85, at the higher end of its indicative range. That offering was oversubscribed 180.3 times in its retail tranche. GF’s shares jumped 34.7 per cent on their Hong Kong debut to HK$25.4.

The Shanghai Composite Index reached a seven-year high of 5,178 on June 12, 2015, followed by a slippery downward slope. Shares price of GF and HTSC now stand far below their offering price. That has brought pricing pressure on their peers who now want to list.

“Investors don’t have to buy new shares being offered if they want to hold some brokerage stocks — unless their offered price is really cheap or the brokerage’s business is particularly good,” Hong Kong Securities Association chairman Benny Mau said.

“There are a lot of leading Chinese brokerage firms listed in Hong Kong and the valuations have been quite low recently,” Mau said.

Earnings of brokerages have fallen off a cliff this year because trading turnover has shrunk sharply. But the worst is yet to come.

China Merchants Securities saw net profit in 2015 jump 2.8 times year-on-year to 10.9 billion yuan (HK$12.9 billion). Then its bottom line for the first quarter this year slumped an annual 62.0 per cent to 1 billion yuan, according to its filings to the Hong Kong bourse.

Valuations have been quite low recently
Hong Kong Securities Association chairman Benny Mau

In the first quarter, the net profit of 24 mainland-listed brokerages plunged 50.9 per cent year-on-year, hurt by the reduced trading turnover, according to data in a research report by Sinolink Securities.

Trading turnover both in Hong Kong and the mainland has since continued at low levels.

Turnover in Shanghai on Wednesday was 117.8 billion yuan, its lowest level since January 7. On that day Chinese regulators decided to suspend its short-lived circuit breaker system that automatically suspended trade in a stock if it fell as much as 5 per cent.

Turnover in Hong Kong hit its lowest level — HK$43.8 billion — this year on Tuesday.

“But they have to continue the IPO process after splashing out a lot of money to prepare for it,” Choy said, referring to the brokerages. “It’s never easy to forecast market sentiment, but brokerages will own the ‘listing’ position, which paves the way for further fundraising or a share placement.”

Chinese brokerages need approval from the China Securities Regulatory Commission before selling shares in Hong Kong. So if Everbright, China Merchants and DFZQ choose not to list under current conditions, it is not certain they will be approved again, Mau said.

“If the market is tepid, they can lower the fundraising horizon, because the sale price won’t be high. But they can raise funds again when market sentiment turns better, or when their share prices increase,” Mau said, “Meanwhile they can use the money raised in overseas business. That’s quite convenient because it’s not easy nowadays to take mainland capital outside.”

Hong Kong is anyhow an open market and the exchange is welcoming to acquisitions and placements, Choy said. Despite a price discount of H shares to mainland A shares, ranging from 10 per cent to over 30 per cent, a listing in Hong Kong is still alluring for mainland brokerages.

Market watchers now expect the upgrade of Shanghai Hong Kong Stock Connect — where investors can cross-trade between the bourses — to increase market activity and push up brokerages’ income and stock prices.

“I feel the Shenzhen Hong Kong Stock Connect will only stimulate the market in the short term if the framework is similar with Shanghai stock connect, because there are so many limits,” Mau said. “But I rather expect an upgraded version of Shanghai stock connect.”

Lowering the minimum capital requirement for mainland individual investors, which is 500,000 yuan at the moment, and expanding tradable products will benefit the brokerage houses in the long run, he said.