Does the Citic Securities offering show the A-share market is topping off?

In a move some domestic commentators describe as opportunistic, Citic Securities seeks to raise $3 billion from a placement of A-shares.
Citic Securities, the first of ChinaÆs securities companies to list, launched a $3 billion new share offer on Thursday, priced at Rmb74.91 per share, a 16% discount to WednesdayÆs close. The deal is due to close on Monday (August 27).

ôThis is good timing by Citic Securities. I think they feel they are at the top of the market and are driven by timing rather than strategic objectives,ö says one domestic security analyst.

The companyÆs share price has gone up by three times year-to-date. The broader market index also reached a new record on Thursday û one of many in past months û breaking through the 5,000 point barrier.

ôWith stock prices this high, lots of companies are doing secondary issuances,ö notes Zuo Xiaolei, head of macro research at China Galaxy Securities.

Citic Securities is one of just three listed securities companies. Unlike Haitong Securities and Hongyan Securities, which both bought listed shell companies, Citic Securities went public through an IPO.

The companyÆs stated aim is to use the proceeds from the follow-on issue to boost its capital and develop its business. However, sources say that Chinese securities companies are still scarred by the bear market between 2002 and 2005. During that time, they suffered horrendous losses as share trading dried up.

Citic Securities, for example, made just Rmb166 million in 2004. In contrast, net profits soared to a remarkable Rmb4.2 billion in the first half of 2007. ôNow, with the markets so high, they are æmaking hay while the sun shinesÆ û and probably getting ready to ride out a downturn,ö says the analyst.

One foreign fund manager in Shanghai believes the spike in the A-share market is unsustainable, noting: ôThe markets are out of control. We will see a correction in the next 12-18 months.ö

But another foreign fund manager, Luca Frontini, of Lombard Fund Management, does not believe that a correction is necessarily imminent, given the Olympics next year, as well as the country's ôexcellent micro and macro fundamentalsö. ôThe markets should continue their rally, at least unless the government deliberately tries to derail them,ö he says.

As evidence for optimism, Frontini points out that the earnings announcements by Chinese companies over the past two years have been extremely strong, with some companies announcing triple-digit profit increases.

Sources say the funds raised by Citic might also be used to lessen the groupÆs dependence on the securities market should a downturn set in. ôIt could be that the Citic Securities decides to use these funds to expand by buying an insurance company or another bank, thereby reducing its reliance on income from the securities market,ö says the domestic analyst.

Indeed, Citic Securities also announced Thursday that it has gained approval to acquire a futures brokerage, Shenzhen Bull Futures, for Rmb100 million. Citic Securities is also planning to set up a private equity unit.

Citic Securities is no stranger to acquisitions. Last year, the company took a controlling stake in Wantong Securities. In the same year, the company also bought a fund management company. But all are too tied to the performance of the A-share market to act as a buffer in a downturn.

The mainland analyst says it is unlikely that the company can replicate the success of China International Capital Corporation (CICC), which is the only large-scale securities company in China not affiliated to a major business group. CICC is considered the best locally owned investment bank in China.

Fraser Howie, an author of several books on the stockmarket, estimates that Citic is using the issuance to boost its capital base. "The company's capital base is quite small relative to its profits," he says.
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