Guotai Junan’s Hong Kong IPO sees cautious response from retail investors

Guotai Junan Securities has received a relatively cautious response from retail bidders for its HK$16.47 billion initial public offering, the biggest one in Hong Kong this year.

Analysts said investors are wary of Chinese brokerages as the industry is still recovering from the bursting of China’s stock market bubble in 2015 and early 2016.

“The IPO came at a challenging time for the brokerage industry,” said Linus Yip, chief strategist for First Shanghai Securities.

“After the stock market turbulence from 2015 to 2016, the industry is still recovering.”

Guotai Junan Securities, China’s third largest broker by assets, is looking to raise HK$16.47 billion through the sale of 1.04 billion shares at HK$15.84 apiece. Five per cent of the shares are for public offering in Hong Kong, while the rest are in the international placing tranche, largely targeting institutional investors.

The IPO, which opened Tuesday, closed for subscription on Friday. Shares are scheduled to begin trading on April 11.

The retail tranche received bids for two times the number of shares on offer, according to information compiled by Infocast by Friday evening.

The international placing tranche has been oversubscribed by more than three times.

“It’s not too bad, but not too good either,” Yip said.

Among recent debuts in Hong Kong, construction work contractor Chanhigh Holdings, which started trading on Friday, was oversubscribed by more than 63 times in its retail tranche.

Apartment builder SHIS, which debuted earlier this week, received bids for shares 127 times the offered size.

“Retail investors are reluctant to bet big on brokerage firms which are not doing quite well in the current market environment,” said Kenny Tang, chief executive for Jun Yang Securities.

After the stock market turmoil, China’s securities industry has seen a sharp drop in profitability in 2016.

Guotai Junan Securities’ revenues fell 31 per cent in 2016 to 25.8 billion yuan while its net profit declined 37 per cent to 9.8 billion yuan. The company said “fluctuations in securities markets” have led to revenue drops in the margin finance and brokerage businesses, and securities transaction and investment.

“Trading volumes in A-share markets are still not strong, ” Tang said.

Besides, analysts said Hong Kong already has a number of listedChinese brokerage firms, including Citic Securities, Haitong Securities, Galaxy Securities, among others.

“There are many stocks of this type,” said Yip. “So the demand for Guotai is not that great. ”

He pointed out that some previous IPOs of Chinese financial companies didn’t perform that well, which has affected sentiment.

Dongfang Securities and CSC Financial both fell below their IPO prices on their first trading days in Hong Kong in the second half of last year. Everbright Securities dropped below its IPO price three days after its H-share debut last year.

However, Tang believed the downside risk to Guotai Junan’s share price will be limited.

Compared with retail investors, institutional investors have a relatively warmer response toward Guotai’s IPO.

Tang said the better response suggests they are more optimistic about the medium to long term outlook of the brokerage’s share price.

“The valuation is reasonable, as the IPO pricing has a discount of more than 20 per cent to its A-share price. It also implies a 1.08 times price-to-book ratio. It’s lower than its peers.

“Once the A-share market starts to rebound, Guotai shares will also pick up momentum,” Tang said.