A planned Shanghai listing of Guotai Junan Securities, China’s third largest brokerage by assets, is expected to herald the IPOs of more securities houses in mainland China.
Guotai Junan could raise Rmb15 billion-Rmb20 billion ($2.5 billion-$3.3 billion) through the IPO if market conditions permit, according to a source close to the issuer.
The deal is still at an early stage and is likely to happen by year-end, with more than 100 companies that have already gone through part of the application process still waiting for approvals, said the source.
Guotai Junan plans to issue 1.525 billion new A-shares or 20% of its share capital, based on a prospectus released on late Tuesday night. The proceeds will be used for capital replenishment and business development, and will pump up the company’s net assets to Rmb50 billion, said the company.
Three others – Shanghai-based Oriental Securities, Hefei-based Huaan Securities and Beijing-based Dongxing Securities – also unveiled A-share listing prospectus and plan to issue 1 billion, 800 million and 500 million new shares, respectively.
The eagerness of Chinese securities houses to list stems from their need to diversify, develop new business and reduce reliance on brokerage.
China’s securities sector saw income slip for three consecutive years since 2009, according to a KPMG survey in 2013. Dwindling trading volumes in the stock market and a drop in revenue raised from IPOs dragged on the results of the brokerage and equity capital market business, hitting the sector’s operating income and net profits.
At the same time, a report by the Securities Association of China, which tracks 114 such companies, shows that investment income from proprietary trading, margin lending and other alternative investments is growing and accounted for more than one-fifth of industry profits last year.
The plans of the securities houses offer hope they can successfully tap the A-share IPO market again for funds after a two-year drought.
Not a single securities house has listed in the A-share market since Western Securities raised Rmb1.7 billion through an IPO in 2012.
Since then, the China Securities Regulatory Commission introduced rules that prevented securities firms from going public if their controlling shareholder controlled more than one securities house, or any shareholder held stakes in more than two brokerage firms.
Guotai Junan’s controlling shareholder Shanghai International Group wholly-owned Shanghai Securities, which was a hurdle for Guotai Junan’s listing plan. However, Guotai Junan itself acquired 51% of Shanghai Securities in January to settle the problem, according to the prospectus.
Even without this consideration, the path to A-share IPOs was closed by the CSRC for more than a year to give the regulator time to clear up the primary market and rebuild confidence for the secondary market.
Some could not wait so long and transferred to Hong Kong. Central China Securities, a Henan-based brokerage that planned to list in the A-share market, has filed listing application to the Hong Kong Stock Change for a $400 million IPO.
China International Capital Corp (CICC) is looking to tap the Hong Kong market as soon as this year, following in the footsteps of rivals Citic Securities and Haitong Securities.
Galaxy Securities and Huarong Securities act as joint sponsors on Guotai Junan’s deal, as well as joint bookrunners along with Ping An Securities.