Chinese brokers brace for bigger H-share discount
At least three Chinese brokerages are readying Hong Kong IPOs for the first half of the year, while two more will launch chunky H-share placements soon. The trades should be well received as investors have cash to spare, but the yawning gap in valuations between A and H-shares and a surfeit of offerings from the sector mean that issuers and underwriters will need to relent on pricing, writes John Loh.
GF Securities started pre-marketing its $2bn-$3bn IPO on March 16, while HTSC and Guolian Securities Co each filed a draft prospectus this week with the Hong Kong Stock Exchange to raise around $1.5bn and $380m, respectively.
Also on the cards are H-share placements for Citic Securities and China Galaxy Securities. And after hitting the screens with a HK$29.94bn placement in December, Haitong Securities is back in the market to raise HK$9.10bn from a rights issue.
GF, which is set to open books on March 23, will be the first to cross the finish line among the Chinese securities houses. Bankers marketing the deal said investor education has already generated good feedback for the estimated 1.5bn H shares it wants to sell.
But while fund managers are keen to park their money in new issues, market watchers warn that brokerage IPOs will not be a walk in the park.
One reason for this is valuations. The mainland stock market has been on a tear since the rapid succession of rate cuts in China, pushing A-shares to a premium over H-shares, as shown by the Hang Seng China AH Premium Index’s current reading of 131.84, near its highest level in five years.
The effects are being felt in Hong Kong. Key to the listing of GF will be the discount it offers on its A-shares, said bankers.
GF is seen as a test case in more ways than one, as it is not only a yardstick for the FIG offerings to come, but will also be the first to exceed the maximum 10% discount allowed for H-share IPOs.
“While there hasn’t been any formal guidance or announcement from the regulators, it has been our understanding since the end of last year that no limit will be placed on the discount between the A and H-shares for brokerages IPOs,” said a Hong Kong-based ECM banker at a Chinese bank.
“GF sets the precedent for the China Securities Regulatory Commission (CSRC),” said a second banker on the trade. “The regulator is relaxing the rules because of the huge rally in the A-share market. It knows that deals will have a tough time with the 10% cap.”
Only Citic had been granted such a waiver in the past when it listed in Hong Kong in 2011, he added. The CSRC had allowed Citic to price shares at a 13% discount to its A-shares to help it weather the then-challenging market conditions.
The first banker said it was difficult to say how investors would react to the change, although it was a foregone conclusion that a discount of more than 10% would have to be offered to make these trades palatable to investors.
Some bankers away from GF have even suggested that a discount of as much as 30% might be necessary to get books covered.
“Issuers need to be realistic,” said investment banker-turned author Philippe Espinasse. “I can’t think of anyone who will bend over backwards to buy shares in Chinese brokerages unless the story and valuations are particularly compelling."
To aid with valuations, GF will be benchmarked against its own A shares, which are trading at a price-to-book ratio of 3.76x and a forward P/E of 22.5x.
As for H-share names, Haitong is cited as a useful reference. It has a similar size to GF, and although pre-marketing was still happening at the time of writing, bankers said GF could be valued on par with or at a slight discount to Haitong, given that GF’s China-listed shares trade at a premium of 40%-50% to Haitong’s Shanghai-quoted stock.
While there could be timing issues if all the brokers come to the market at the same time, the impact is likely to only be a short term one on pricing.
“In the longer term the market should be able to absorb these trades,” said Stephen Peepels, a Hong Kong partner for DLA Piper. “This is a comparably positive year for China FIG, and Hong Kong is open for business.”
The liquidity in the market reflects this, said bankers. Investors are hungry for fresh paper as Hong Kong’s primary activity has been muted since blockbuster trades like Dalian Wanda closed 2014 with a bang.
“There is a lot of appetite out there,” said a syndicate banker at a bulge bracket firm. “If there are large trades people will surely be looking at it.”
Yet, those looking to print deals will have to contend with the fact that investors are feeling edgy.
“They have the cash, but they are also price sensitive,” he said. “At the same time, the market has been volatile given what’s been happening with the Fed, and investors are acting like it’s 2008.”