GF Securities scores year's largest debut with $3.6bn IPO

China’s fourth largest brokerage priced its H-share IPO on March 31 at HK$18.85 a share, selling 1.48m primary shares. Books in the institutional tranche were multiple times covered at the top end of the marketing range of HK$15.65-HK$18.85.

Retail investors were just as exuberant. This tranche was about 180 times covered, triggering the full clawback and increasing their allocation from 5% to 20%, bankers said.

“This was a no-brainer IPO,” said a banker who worked on the listing. “It was 50% covered by cornerstones at the start, and after deducting the retail portion and cornerstones, there was just over $1bn left for institutional investors.”

But the overwhelming demand meant bankers had a headache when it came to allocating the book.

“Except for retail investors, everyone got scaled back,” the banker said. “And with a book this heavily subscribed it was always going to be a nightmare to allocate — all the more so with the issuer getting into the picture.”

There were 22 banks in the syndicate, but three of those — namely joint sponsors GF Capital and Goldman Sachs, as well as Morgan Stanley, one of the joint global co-ordinators — effectively held sway over allocations and had full oversight of the book. 

But the large syndicate did not stop the issuer from also looking to take the driver’s seat when it came to allocations. “The issuer had very clear views on the majority of the investors in the book and was very hands-on,” said a banker at one of the leads.

“For relationship reasons, the issuer tried to take out some Chinese accounts, but it also made sure the bigger investors went home with stock,” the first banker said. “That’s only natural – the issuer itself is an investment bank and its own unit the main sponsor of the IPO.”

The book had gone through multiple revisions and some heated discussions by the time everything was wrapped up at 6pm on March 31, said bankers.

Investors from “all walks of life” participated in the IPO, said the second banker. This included institutions, corporates, hedge funds and private wealth managers, although the book was skewed towards Chinese and international long-only funds, ensuring it was of the highest quality.

Books closed with hundreds of global accounts joining, and allocations were top-heavy as the top 20 investors bagged 70% of the shares carved out for non-cornerstone and non-retail investors.

“Despite all the new FIG paper that’s getting printed, people are in love with this sector at the moment,” the banker added.

Although there is no lack of upcoming H-share IPOs from the brokerage sector, with HTSC and Guolian Securities Co making overtures to the Hong Kong Stock Exchange in recent weeks, bankers working with GF said its long track record and reputation helped drum up interest.

“There are so many brokerages in China, probably over 20, and they are not very different from each other,” said the first banker. “Where GF stands out is its roster of high net worth clients, which means it has a more profitable franchise.”

GF is also top three underwriter for equity deals in China and is the go-to broker for IPOs and follow-ons from small and medium-sized companies, which, as they are private firms, offer more lucrative fees than state-owned enterprises.

The trade also owes much of its success to the rally in China’s domestic stock market since the country started easing rates at the end of last year and the discount that GF was willing to offer against its Shenzhen-traded shares, which presented an arbitrage opportunity for investors.

“It was a good window and GF made full use of it,” the banker said.

But even though the deal serves as a benchmark for Hong Kong IPOs of Chinese securities houses, bankers said pricing would still be key as the market remains volatile.

“Some investors turned down the offer to be cornerstones in GF because of the six-month lock-up,” said the banker. “It’s hard to read the market and they were not comfortable keeping so much money in one place for a long period of time.”

GF’s H-shares were marketed at a hefty 43%-52% discount to its A-shares, which closed on March 19, the day before the IPO launched, at a P/B value of 4.3x. The IPO valuation worked out to a 2015 P/B ratio of 1.42x-1.62x, which compares favourably not only to GF's A-shares, but also its H-share benchmarks such as Citic Securities, Haitong Securities and China Galaxy Securities.

Those three were trading at 2015 P/B valuations of 2.2x, 1.8x and 1.6x, respectively, making GF look like a bargain even at the top end of the price range.

The IPO got off to a rousing start after 18 cornerstone investors signed up for more than half of the trade, giving GF plenty of momentum when bookbuilding began on March 23. They mopped up $1.872bn worth of stock. Fubon Life Insurance led the list of cornerstones, with a commitment for $300m.

The rest were LR Capital Principal Investment ($250m), CM International Capital ($200m), Xizhang Energy Investment ($120m), Huaxia Life Insurance, Hwabao Investments, Haier Electrical Appliances and J&P Capital Management ($100m each), Greenland Financial Overseas and Zhehao Asset Management ($70m each), Zhongxinjian ($60m), Foresea Life Insurance, Cinda Sinorock and CSR Co ($50m each), Veritas ($32m), and Citic Securities and CTBC Life Insurance ($10m each).

GF has dethroned Jasmine Broadband Internet Infrastructure Fund as the largest IPO in Asia ex-Japan ex-onshore China this year and raised the most money since Dalian Wanda Commercial Properties Co’s $4.04bn December listing, according to Dealogic. 

Half the proceeds from GF’s IPO will be used for developing the firm's wealth management business, 20% for investment management, banking and institutional client services, and the remaining for the expansion of its operations internationally. 

GF will be listed on the Hong Kong Stock Exchange on April 10.

GF Capital and Goldman Sachs led the syndicate as joint sponsors. Goldman, which is the stabilisation agent, shared joint global co-ordinator, joint bookrunner and joint lead manager duties with Bank of America Merrill Lynch, Bank of Communications, Deutsche Bank, GF Securities and Morgan Stanley.

Other joint bookrunners and joint lead managers were ABC International, CCB International, China Securities, CIMB, China Merchant Securities, Guosen Securities, HSBC, Huatai Financial, ICBC International, Industrial Securities and SHK Financial.

Further down the list were China Galaxy, China Investment Securities, Changjiang Securities, Daiwa and Qilu, who were joint lead managers.