Guotai Junan IPO: a turning point for cornerstones
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Guotai Junan IPO: a turning point for cornerstones

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Guotai Junan Securities Co’s IPO in Hong Kong is sending all the right messages, but the most important one may be its smaller reliance on cornerstone investors. It has placed just under 30% of the HK$16.5bn ($2.1bn) float to six funds — a move that may well mark a turning point for oversized cornerstone allocations in the city.

It remains the case this year that syndicate teams are still bulging for Hong Kong IPOs. Wisdom Education International Holdings, for instance, enlisted 10 firms to work on its January float — which raised just HK$850m. Guotai Junan has 20 banks on its roster, but that is commensurate with the size of its fundraising.

The cornerstone allocation tells a different story. Guotai Junan’s cornerstone investors have taken up only a HK$598m portion of the listing before books were opened on Monday, a far cry from the record amount of stock they absorbed in Hong Kong last year.

In 2016, cornerstone investors bought over 50% of all share debuts in the city versus 41% in 2015, according to Dealogic. Many of these funds were Mainland corporates, who stepped in to fill the void left by China-averse global investors. 

Coincidentally, Guotai Junan’s IPO will be the largest listing in Hong Kong since Postal Savings Bank of China’s jumbo HK$58bn float last year. Yet their cornerstone strategies could not be more different.

Postal Savings had 76% of its shares locked up mostly with Chinese state-owned firms. Guotai Junan, in contrast, signed up a unit of UK private equity investment group Apax Partners as the largest cornerstone account for $388m. And as far as international investors go, Japan’s Tokai Tokyo Securities came on board for $10m.

The move is a sign of confidence that a proper book for the deal will be built during the roadshow. But more importantly, it could also be a sign of things to come.

For starters, Guotai Junan’s cornerstone group is not comprised mainly of Chinese corporates or state-backed enterprises. Instead it is a distinctly institutional bid — the type that bulge brackets have been trying to woo back to Asia.

Better times ahead?

This would be a marked change from the chronic dependence on cornerstone investors that defined much of 2016, as GlobalCapital Asia has written about previously. So enamoured were issuers with the cornerstone allocation that underwriters in Hong Kong needed to pitch for an IPO armed with potential investors.

An outsized cornerstone tranche has led to other problems, such as squeezing out liquidity for other investors and pushing price discovery to the sidelines, as well as decimating trading volumes. Amid a tough year, banks put up with this so that deals could get across the line.

But hopefully, things are changing as underwriters observe that the “cornerstone first” conversation is taking a backseat. And this trend could continue beyond Guotai Junan’s deal.

Of course, there are other factors buoying its IPO. Guotai Junan, which will be one of the last sizeable Chinese securities houses to be listed in Hong Kong, is being sold at a juicy 25% discount to its Shanghai-traded shares. The listing is also being marketed at 1.08x forward price-to-book versus an average of 1.11x for comparables.

What also will help is that the market backdrop for Asia ECM is increasingly positive, and so is risk appetite among institutional investors. Most Hong Kong IPOs this year have traded up in the aftermarket, even as the boost in global equities has given investors more capital to pour into primary.

Still, if the strong response to Guotai Junan so far extends into the aftermarket, then bankers can take heart that the cornerstone craving may soon come to an end — provided issuers stick to reasonable valuations and markets hold up.

The ingredients are in place to make 2017 a much better year for ECM. Here’s hoping banks can finally go back to giving cornerstone investors in Hong Kong IPOs a decent, rather than outsized, share of the pie. 

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