Galaxy Securities enlists 21 banks to raise up to $1.37 billion

Six cornerstones, including Malaysia’s Khazanah, have agreed to buy $280 million worth of shares in the offering, which looks set to become the second largest IPO in Hong Kong so far this year.
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Galaxy Securities is the biggest securities brokerage in China
<div style="text-align: left;"> Galaxy Securities is the biggest securities brokerage in China </div>

A couple of things stood out when China Galaxy Securities started the management roadshow and opened the order books for its Hong Kong IPO yesterday: The issuer has decided to add another five banks to the bookrunner line-up at the last minute for a staggering total of 21(!) and the cornerstone tranche accounts for just 20% to 28% of the total deal size.

The rest of the terms were largely in line with expectations, with the base deal size amounting to between HK$7.82 billion and HK$10.61 billion ($1 billion to $1.37 billion), and the bottom end of the price range set at a discount of close to 15% versus Haitong Securities, which is viewed as the closest comparable.

That should serve as a hook to help attract investors to the deal, although no doubt the securities firm, which is close to 90% owned by state-owned entities, is aiming to fix the price above the bottom of the range.

The shares are offered at a price between HK$4.99 and HK$6.77 each, which translates into a 2013 price-to-book multiple of 1.19 to 1.48 times, based on the average estimates by the syndicate banks that printed research.

According to one source, the discount to Haitong at the bottom of the range is 14.4%, while the top of the range values Galaxy Securities at a 6.2% premium to Haitong, which has gained 8.5% since its Hong Kong trading debut just over a year ago. At the peak in early February, Haitong was up as much as 30%, but weak trading volumes, falling share prices and a lack of IPOs in China’s domestic stock market continue to take a toll on the industry and the stock price came under pressure again during February and March.

On a price-to-earnings basis, the price range values Galaxy Securities at a 2013 multiple of 14.1 to 19.2 times post-shoe.

The greenshoe could add another 15% to the deal size and increase the total proceeds to between $1.16 billion and $1.57 billion. Even without the shoe, it will be the second largest IPO in Hong Kong this year after Sinopec Engineering, which also launched its offering yesterday and is seeking to raise between $1.7 billion and $2.2 billion.

Taking the greenshoe into account, the size of the cornerstone tranche stands out even more. Of course, a couple of years ago, it was viewed as completely normal to set aside between 20% and 30% of an IPO for cornerstones who would be locked up for at least six months. But since then, the appetite for new listings has cooled significantly and in the past 18 months or so, Hong Kong IPO candidates have tended to allocate as much as half the deal — sometimes even more — to cornerstones before they open the order books to the broader market.

In light of that, the $280 million that Galaxy Securities has secured from the six cornerstones looks pretty small — particularly when you consider the fact that it has 21 bookrunners. Like insurance company PICC before it, Galaxy Securities had indicated that the syndicate roles would be linked to the amount of demand that the banks were able to bring in. And with five banks added to the syndicate over the weekend, one could perhaps have expected a bit more visible demand.

The company no doubt also had anchor demand lined up before launch, although there was no reliable information available on that as of yesterday. One can suspect, though, that some potential cornerstones may have hesitated to commit to the top end of the price range and opted to come into the deal as anchors instead. That way they don’t have to agree to buy the shares throughout the range, but can put a price limit on their orders.

The general view among investors appears to be that Galaxy Securities should trade roughly on par with Haitong Securities, so the premium valuation at the top of the range does look pricey.

Among the cornerstones, the most interesting name is Khazanah. The state-owned Malaysian investment company, often referred to as a sovereign wealth fund, has agreed to buy $100 million worth of shares, which makes it the largest of the six disclosed investors. The only other non-Chinese investor is AIA, which has committed to buy $50 million worth of shares.

The others are all Chinese enterprises with links to the state, which confirms the belief that Beijing will make sure that Galaxy Securities’ IPO is successful.

Sino Life Insurance will invest $50 million, China Life Insurance and China General Technology (Genertec) will each take $30 million worth of shares and China Cinda (HK) Asset Management is buying $20 million worth.

The six cornerstones will all be locked up for six months.

With regard to the syndicate structure, it seems to have been confirmed at the very last minute and many of the term sheets that went out to investors yesterday didn’t even attempt to spell out all the banks involved. Several sources confirmed that the number of bookrunners has been increased to 21 from the original 16, and that there are five global coordinators, but few seemed to have a clear idea of which banks are in effect leading the deal and whether some bookrunners are more junior than others (which ought to be the case if the syndicate roles are indeed linked to the amount of demand brought in).

Most likely, the full picture won’t be known until the fees are divided up, and even then it is unlikely to become completely clear. What is known is that Galaxy Securities will be paying a higher fee than Sinopec Engineering, which looks intent on setting a record for the lowest fee paid on a sizeable Hong Kong listing in recent years. Sources say the base fee will be only 1%.

However, the 2% to 2.5% base fee that Galaxy Securities is expected to pay, according to sources, is still not super generous — particularly when considering that it has to be shared by 21 banks. And since one can safely assume that it won’t be divided equally, some banks are not going to get that much for their effort. That said, the banks that were brought in over the weekend — after the two weeks of investor education were already completed — can hardly complain.

Galaxy Securities is also expected to pay an incentive fee of up to 1%.

As expected, the three sponsors of the IPO — Goldman Sachs, J.P. Morgan and Galaxy’s own international investment banking arm, Galaxy International — were also named global coordinators, but they will have to share that title with ABC International and Nomura. It is unclear exactly why these two were singled out for a more elevated role, but sources suggested that it is likely due to a combination of their previous relationships with the client and the demand they brought in.

The other bookrunners are Bocom International, Bank of America Merrill Lynch, Credit Suisse, CCB International, Citi, Deutsche Bank, Haitong Securities International, HSBC, ICBC International, Standard Chartered, UBS, Citic Securities, Guotai Junan, Essence Securities, BOC International, and Everbright Securities. The final five are the ones added most recently.

The base deal will comprise approximately 1.568 billion H-shares, which accounts for 20.9% of the enlarged share capital. About 95.7% of the shares are new, while 4.3% are secondary since the National Social Security Fund (MSSF) will sell some of the H-shares that it is set to receive in connection with the IPO.

The split between new and old shares will be the same for the greenshoe, which will amount to a total of 235.1 million H-shares.

The deal will have the usual split for a Hong Kong IPO, with 10% of the shares set aside for local retail investors and the remaining 90% targeted at institutional accounts. Standard claw-back triggers apply, however, and could result in as much as 50% of the deal being allocated to retail investors in case of strong demand. Given the muted interest for IPOs among the Hong Kong public in the past year, this does seem unlikely though.

Galaxy Securities ranked as the biggest securities brokerage in China in each of the years from 2008 to 2012 and has one of the largest client bases in the industry with 5.573 million brokerage clients at the end of last year, according to a preliminary listing document published on the Hong Kong stock exchange website yesterday.

It also has the largest brokerage network with 229 branches spread across 30 provinces throughout China. Its strong position in the brokerage market suggest that Galaxy is a key beneficiary when the stock market is doing well and A-share trading volumes are high, but that also means that it has greater exposure to the poor market that has dominated the past year.

According to the listing document, it derived almost 65% of its revenues from commissions and fees last year. And revenues from those items declined to Rmb3.83 billion ($616 million) last year from Rmb4.66 billion the previous year and Rmb6.9 billion in 2010.

Hong Kong-listed Citic Securities and Haitong Securities have a more balanced revenue breakdown with 23% to 25% coming from brokerage commissions, according to a syndicate research report.

For more on analysts’ views on Galaxy and the outlook for its business, please see our story published on April 22.

The institutional bookbuilding will continue until May 14 and the final price will be determined the following day Hong Kong time — one day ahead of Sinopec Engineering.

The trading debut is scheduled for May 22.

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