Citic Securities, China’s largest publicly traded brokerage, has raised HK$13.2 billion ($1.7 billion) in the largest IPO from the financial sector in Asia-Pacific so far this year.
The deal is also the third biggest Hong Kong IPO this year, following Prada’s $2.4 billion offering and Shanghai Pharmaceutical’s $2 billion IPO, according to Dealogic. Or the fourth biggest if you count Glencore International’s $10 billion dual-listing, which was mostly listed in London.
Demand for Citic Securities' institutional and retail tranches was sharply divided. Retail investors subscribed to just 8% of the shares initially set aside for them, which translates into only 0.4% of the total offering. This means 99.6% of the shares had to be allocated to institutional accounts. The firm originally earmarked 5% of the deal for Hong Kong retail investors, while the remaining 95% was offered to institutional investors.
The institutional order book, which is said to be “high quality”, was three times covered, or six times if you exclude the cornerstone tranche. About 130 institutional investors participated in the transaction. The accounts were a mixture of types and came from all regions, including China, Hong Kong, Singapore, the Middle East, Europe and the US.
Citic Securities, which is already listed in Shanghai, had a strong pitch as the first issuer to offer international investors direct access to China’s brokerage sector. The fact that it is the largest investment bank by net assets the most profitable brokerage and the brokerage with the biggest investment income in China, also helped attract investor interest.
The firm sold 995.3 million shares at HK$13.30 each, slightly above the bottom end of the HK$12.84 to HK$15.20 indicated range. The final price values the company at a 2011 price-to-book (P/B) multiple of 1.28 times and at a 2011 price-to-earnings ratio of 8.95 times. The price also equals a 10% discount to the 20-day volume-weighted average price (VWAP) of Citic Securities’ Shanghai-listed shares, which worked out at Rmb12.11, or HK$14.77.
Citic Securities' Shanghai-listed A-shares have fallen 11% so far this year, compared to a 16% drop year-to-date in the Shanghai Composite Index. The stock closed 2.4% lower at Rmb11.52 yesterday.
“Some investors, who have ties with China, demanded a deep discount. The price wouldn’t be attractive to them without a discount since they have the access to the A-share market,” said a source familiar with the situation.
Depending on the demand in the secondary market, the firm has the option to sell an additional 149 million shares, or 15% of the offering, which could boost the total proceeds to as much as $1.95 billion.
The company braved the market at a time when several issuers have called off their Hong Kong listing plans amid concerns about market volatility and the escalating debt crisis in Europe. Sany Heavy Industry, a Chinese machinery maker, postponed its planned Hong Kong IPO of up to $3.3 billion, while its smaller domestic rival XCMG Construction Machinery has delayed the launch of its offering twice and has also reduced the planned size of the deal. Across the border, China’s top builder of hydropower dams, Sinohydro Corp, lowered its Shanghai IPO target to $2.3 billion from $2.7 billion. The Hang Seng Index has fallen 24% year-to-date.
Demand from international investors was good from day one and many international investors approached the brokerage soon after it announced the listing plan in April, sources said.
Before the bookbuilding started on September 16, six cornerstone investors had agreed to purchase a combined $850 million worth of shares, which at the final price accounts for 50% of the total offering.
The largest among the cornerstones was asset manager Waddell & Reed, which bought $300 million worth of shares. Kuwait Investment Authority invested $200 million, Temasek Holdings $150 million, Brazilian investment bank BTG Pactual $100 million, and Fubon Life Insurance and hedge fund manager Och-Ziff each put in $50 million.
Citic Securities also received many proposals from different investment banks hoping to get involved in the deal. But the firm only picked Chinese banks, including ABC International, BOC International, Bocom International, CCB International, ICBC International and its own investment banking unit Citic Securities International, as bookrunners for the deal. Four foreign banks -- Bank of America Merrill Lynch, CLSA, HSBC and Morgan Stanley -- acted as international coordinators.
The transaction pushed the value of new listings on the Hong Kong stock exchange to $28.9 billion from 57 deals so far this year, up 36% from the $21.2 billion raised in the same period last year, according to Dealogic. Those numbers include the full $10 billion raised from Glencore's dual-listing in London and Hong Kong.
Citic Securities' H-shares will start trading in Hong Kong on October 6.