Haitong Securities returns with HK IPO of up to $1.77 billion

Haitong Securities, China’s second-largest brokerage in terms of total assets and net assets, will kick off the bookbuilding for its revived Hong Kong initial public offering today, with a target to raise between HK$12.88 billion and HK$13.74 billion ($1.66 billion to $1.77 billion). The deal will be done on an accelerated basis with the institutional and retail tranches running parallel to one another and the final price due to be set on Friday.

The deal, which was postponed in December due to volatile market conditions and a crowded issuance calendar, has a more robust commitment from cornerstone investors this time to ensure the listing is a success. According to sources, Haitong has signed up 11 cornerstones, who will buy $580 million worth of shares, or up to 35% of the deal. Hong Kong-based private equity fund PAG is taking the largest portion of $300 million, while other investors include DE Shaw, SBI Holdings and Dah Sing Bank, one of the sources said.

This compares with a cornerstone commitment of no more than 15% of the deal from Warburg Pincus and Chuo Mitsui Trust and Banking in December.

Market conditions have also improved since last December, which should provide a more favourable backdrop for the deal.

If successful, this will be the biggest IPO in Hong Kong so far this year, ahead of Canada’s Sunshine Oilsands that raised $580 million in February. It will also surpass the IPO by bigger rival Citic Securities late last year, which raised $1.8 billion after a partial exercise of the overallotment option.

Since the roadshow for the initial Hong Kong offering, which started on December 1, Haitong’s Shanghai-listed A-shares has climbed about 24%. That compares with a more than 18% rise by Citic Securities’ Shanghai-listed A-shares. And while the Shanghai Stock Exchange Composite Index has fallen about 1% during this same period, Hong Kong’s Hang Seng Index has gained 8.5%.

Haitong is offering 1.229 billion new H-shares, or 13% of its enlarged share capital, at a price ranging from HK$10.48 to HK$11.18. Five percent of the offering has been set aside for retail investors initially, while the remaining 95% will be targeted at institutions. The deal size is the same as the December offering, but looks slightly bigger in absolute dollar terms because of the increase in the A-share price, another source said.

The December deal comprised 1.229 billion H-shares at a price ranging from HK$9.38 to HK$10.58, and could have raised between $1.48 billion to $1.67 billion.

The current price range values the Chinese brokerage at a 2012 price-to-book (P/B) multiple of between 1.3 times and 1.39 times, which equals a discount of roughly 12% to 17% versus Citic Securities’ Hong Kong-listed shares, another source said.

It also represents a discount of about 10.8% to 16.4% versus Haitong’s A-share price, which closed at a 2012 high of Rmb10.23 yesterday (about HK$12.53 after adjusting for the exchange rate). The price of an H-share IPO can typically not be set at a discount wider than 10% versus the company’s 20-day volume-weighted average price in the A-share market.

Headquartered in Shanghai, Haitong have branches across 27 providences and 113 cities in China, and as of September 30 it operated 13 branches in Hong Kong and Macau through its Hong Kong-listed subsidiary, Haitong International Securities.

Haitong was established in 1988 and listed on the Shanghai Stock Exchange in 2007. Like Citic, it offers international investors direct access to China’s brokerage sector.

According to the current timetable, the listing is scheduled for April 27.

Citi, Credit Suisse, Deutsche Bank, Haitong International, J.P. Morgan and UBS are joint global coordinators and joint bookrunners. They are joined as bookrunners by Bocom International, HSBC, ICBC International, Nomura and Standard Chartered. The line-up is roughly the same as in December, although UBS has been elevated to a joint global coordinator and Bocom International and ICBCI have been added as a bookrunner.

In mid-March, Haitong Securities reported its full-year earnings. For 2011, it booked a 4.9% fall in revenues from a year earlier to Rmb9.3 billion ($1.5 billion), and its net profit dropped 15.8% to Rmb3.1 billion, due to a decline in income from brokerage fees.

Haitong will be the first large-scale deal to test the Hong Kong IPO market in the second quarter, although there has been some activity on the small-cap side already.

Yesterday, Jingnan Group, a Chinese manufacturer of wires and cables for power transmissions, distribution systems and electrical equipment, fixed the price for its IPO at the bottom of the range to raise HK$546 million ($70 million). The institutional tranche attracted a mixture of institutional accounts, high-net-worth individuals and corporate investors and was said to have been comfortably covered. However, like several other Hong Kong IPOs this year, the10% retail tranche wasn’t fully subscribed and the excess shares had to be reallocated to the institutional portion.

The price was fixed at HK$1.42 per share, which translated into a 2012 price-to-earnings multiple of 4.5 times. The company sold 25% of its enlarged share capital in the form of 384.8 million shares, of which 88% were new. This deal too was done on an accelerated basis with the institutional and retail offerings running in parallel over four days last week. Daiwa was the sole bookrunner.

Meanwhile, Credit Suisse and Guotai Junan have entered the second week of pre-marketing for China Great Wall Electric’s upcoming IPO, which is scheduled to launch on Monday. The company, which makes electrical transformers and power switches targeted primarily towards end-users, is aiming to raise about $100 million. A source said the deal is attracting interest among small-cap investors, not least because the company is backed by Yuantai, which is the same Chinese private equity fund that backed AAC Acoustic Technologies ahead of its IPO in 2005. The latter had a market cap of just $495 million at the time of listing and raised a modest $109 million, but since then the share price has gained 780% and the market cap has increased to about $3.8 billion.

However, investors are said to be looking for a meaningful IPO discount to what they view as fair value. A syndicate research analyst puts the fair value for Great Wall Electric at about 10 to 13.5 times this year’s earnings.

The company is looking to sell about 30% of its share capital and is aiming for a listing towards the end of the week of May 7.