Chinese brokerage IPOs a tougher sell in 2016

Chinese securities firm earnings are under pressure as brokerage fees come off their elevated 2015 levels, making it harder for ECM bankers to bring new offerings to market.

Chinese brokerages preparing to list this year are finding it hard to gain traction with investors, in contrast to some of their rivals in the first half of last year when Chinese stock markets were caught up in a frenzy of buying.

As a result, equity capital bankers contacted by FinanceAsia believe they will not see light this quarter.

Bankers are expecting an uphill struggle for some of the equity offerings planned, including those by Everbright Securities, Orient Securities, and China Merchants Securities, as most of these companies are expected to report lower earnings this year due to reduced brokerage fees and commissions after a sizzling 2015 performance. 

The profit of Everbright Securities, for example, more than tripled to Rmb7.6 billion ($1.2 billion) last year to more than the combined profit of the previous five years, thanks mainly to a substantial increase in brokerage fees.

At 282% year-on-year, equity sales and trading reported the fastest earnings growth among all its business divisions, according to Everbright Securities’s annual report.

Such earnings growth was largely the result of a rapid boom in margin lending during China’s big stock market rally at the beginning of last year, when the Shanghai Composite Index more than doubled in just seven months.

At that time China’s outstanding margin financing reached a record high of Rmb2.2 trillion as investors borrowed money to invest in the country's red-hot stock markets, according to data from the Shanghai and Shenzhen stock exchanges.

But that boom has fizzled out since July as investors cut back on the debt used to invest in equities, leading to a plunge in margin financing. China’s total margin financing balance stood at Rmb834 billion on Tuesday, down more than 60% from the peak level last year.  

In turn, that has weighed on Chinese brokerage earnings. For instance, China Merchants Securities said its net profit fell by 62% in the first quarter compared with the same period last year, while Orient Securities's slumped by 78%.

Falling profitability means these companies will have to resort to lower valuation for their H-share offerings, resulting in reduced offering size and proceeds.

China Merchants Securities is expected to cut the size of its H-share offering by as much as 50% to $2.5 billion, according to bankers familiar with the situation, while the other two brokerages are also expected to reduce the offering size of their upcoming H-share offerings.

Fading demand

Apart from declining profitability, one factor deal advisors will have to evaluate is how much demand is left for Chinese brokerages after last year's series of billion-dollar equity fundraisings from the sector.

In the three-month period between April and June last year, six mainland brokerages raised a whopping $19.4 billion from either initial public offerings or private share placements, capitalising on the domestic stock market rally to raise capital at a decent pricing level. 

At that time, all three Hong Kong-listed brokerages were able to execute billion-dollar private placements and raised funds that were more than double the size of their respective IPOs.

Haitong Securities was the largest fundraiser with a $4.2 billion private placement, while Citic Securities and Galaxy Securities raised another $3.5 billion and $3.1 billion, respectively. In the same period, the IPOs of HTSC, GF Securities, and Guolian Securities soaked up another $9.5 billion.

All six securities houses have seen their share price fall below the level set in their equity raises, implying that a large portion of liquidity might be locked up with existing shareholders unless they are willing to sell at a loss.

“The willingness to invest in new mainland brokerage IPOs is limited because of the weak performance of their listed peers,” one Hong Kong-based ECM banker told FinanceAsia. “As a result many of them are considering selling at a big discount to their A-shares as well as their Hong Kong-listed peers.”

ECM bankers said Everbright Securities, Orient Securities, and China Merchant Securities had aimed to complete their deals in the first half of 2016 but it now appears unlikely given the current market backdrop.

¬ Haymarket Media Limited. All rights reserved.
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