China Merchants Securities seeks retail investors for Hong Kong’s 3rd biggest IPO this year

China Merchants Securities kicks off its H-share sale for retail investors on Tuesday, as it seeks up to HK$11.4 billion in an initial public offering that would be the third largest in Hong Kong so far this year.

Eleven cornerstone investors, including Tencent Holdings chairman Ma Huateng, and Fosun Group have subscribed for 60 per cent of the shares on offer.

One of China’s ten biggest brokers, CMS is selling 891.3 million H shares at an indicative price range between HK$11.54 to HK$12.78, of which 5 per cent are reserved for retail investors, according to its prospectus. Retail investors need to pay HK$2,581.8 for a board lot of 200 shares.

CMS ranks third among Hong Kong IPOs this year in terms of funds raised, after Postal Savings Bank of China, the world’s largest IPO this year, which raised US$7.4 billion, and China Zheshang Bank, which raised about US$1.7 billion.

“We aim to become China’s best investment bank, and we also expect to expand overseas through Hong Kong,” chairman Gong Shaolin said at a press briefing on Monday.

Commenting on the news that Goldman Sachs is to cut 30 per cent of its investment bankers in Asia, Gong said he still sees increasing business demand for wealth management in the region, as well as opportunities from Chinese companies which actively participated in overseas merger and acquisition deals.

“The pricing is quite cheap comparing it to its peers,” said Sinopac Securities’ research head Ivan Li Sing-yeung. “The difficulty lies in its traditional brokerage business, as trading turnover in the mainland is quite low nowadays, while transition to investment banking is not easy. CMS may focus on demand from China’s private enterprises.”

Price to book ratio, based on its book value last year, was 1.1 to 1.2 times, compared with 1.0 to 1.4 times P/B ratio of its mainland peers listed in Hong Kong, Li said.

CMS Hong Kong, J.P. Morgan Securities and Morgan Stanley Asia are joint sponsors of the IPO. The stock’s trading debut on the Hong Kong bourse is scheduled for October 7.

CMS plans to use 25 per cent of the net proceeds to develop its brokerage and wealth management business, 25 per cent for strengthening institutional clients services and the investment and trading business. Another 25 per cent will be used for overseas expansion.

Ma Huateng and Fosun Group have each promised to buy US$30 million worth of shares, while PICC Life is the largest cornerstone investor, having promised to buy 333.3 million shares, worth up to US$546 million.

CMS was reported to have cut its IPO size nearly 70 per cent as the uncertain market environment dampens investors’ sentiment.

“It’s normal to see change of fundraising target as the market is volatile,” Gong said, “But we are very confident in our business development.”

International placement for the IPO has been fully subscribed, people familiar with the matter told the South China Morning Post.

The broker’s net profit hit a record high of 10.9 billion yuan last year thanks to China’s stock rally, but interim profit for the first six months slumped 70 per cent year-on-year due to a fall in trading turnover in the A share market this year.

The company distributes at least 10 per cent of annual net profit as dividend.