China Galaxy Securities has raised HK$8.31 billion ($1.1 billion) ahead of its Hong Kong listing next week, after pricing its initial public offering at HK$5.30 per share.
The price was close to the low end of guidance provided by the bookrunners on the final day of bookbuilding and in the bottom quarter of the original price range. Even so, Galaxy Securities was priced at only a thin discount to Haitong Securities, which was viewed as the key benchmark, after the latter fell 6.6% during the final two days of the bookbuilding.
Haitong gained 1.5% yesterday, however, which should have made investors a bit more comfortable with the valuation of Galaxy Securities. The final price values the Chinese securities firm at a 2013 price-to-book multiple of about 1.24 times, which equals a 5.3% discount to the 1.31 times that Haitong closed at yesterday, according to Bloomberg data.
When the deal launched on May 6, the bottom end of the price range translated into a 14.4% discount to Haitong, the sources said.
Galaxy Securities was initially offered in a range between HK$4.99 and HK$6.77, but on Tuesday investors were told that the final price would be in the range of HK$5.28 to HK$5.43.
According to one source, the deal attracted about $5.9 billion of demand from institutional investors, including global long-only funds, hedge funds, private wealth managers and Chinese companies. In all, close to 500 accounts submitted orders.
This meant that the portion available for allocation to institutions other than the cornerstones was just over 10 times covered.
When the institutional bookbuilding started, that portion accounted for about $780 million worth of shares at the bottom of the price range (including the 15% greenshoe). But after the surprisingly strong demand from retail investors triggered a clawback that increased the size of the retail tranche to 30% from 10% and the company added one additional cornerstone investor at the last minute, the amount of stock available to institutional investors dropped to just $550 million – even though the price was fixed above the bottom of the range.
The source noted that this led to a squeeze in the institutional order book. Even investors who weren’t entirely happy about the thin discount versus Haitong did participate in the end and while not everyone revised up their price limits after the guidance went out, many did.
Hong Kong retail investors have traditionally had a big appetite for financial stocks, but the strong demand for Galaxy Securities is also in line with a growing retail participation in IPOs in general this year after they shunned pretty much every deal last year.
In order to trigger the first level clawback, the 10% retail tranche needed to be more than 15 times covered and according to various sources it was in fact 28 to 29 times covered. This means that they committed a combined HK$29.7 billion ($3.8 billion) towards the deal – more than the $3.1 billion that they put into the H-share IPO for insurance company PICC Group in December last year.
Given its larger size, PICC had obtained a waiver from the usual allocation requirements towards retail investors, so even though the retail tranche was more than 15 times covered, the clawback only increased the retail portion of the deal to 7.5% from 5%. Galaxy Securities was the first Hong Kong IPO above $500 million to see 30% go to retail investors since MGM China’s $1.5 billion IPO in May 2011.
With about $320 million worth of stock in retail hands, Galaxy Securities could be vulnerable to early selling if the share price doesn’t perform when it starts trading on May 22. Whether or not that will be the case will depend largely on how Haitong Securities trades between now and then.
Galaxay Securities may be the largest securities brokerage firm in China, but given the drop-off in trading volumes in the past year that has weighed on the earnings for the entire brokerage industry, its IPO is still very much a relative value play versus Haitong and to a lesser extent Citic Securities. Those two have been listed in Hong Kong since September 2011 and April 2012 respectively.
On the other hand, Galaxy Securities’ strong position in the brokerage market will make it a key beneficiary when the A-share market turns around. One syndicate research report forecast that Galaxy Securities’ income from commissions, which fell 22% in 2012, will increase by 30% this year and by 18% in 2014. This should help support a pickup in net profit by almost 48% this year and by 30% next year, the report said.
With 5.573 million brokerage clients and a state ownership of close to 70% after the IPO, the firm should also be in the front row when it comes to capitalising on new products, such as stock lending, stock repo, index futures and other derivatives.
As mentioned, Galaxy Securities brought in an additional cornerstone investor – Sinopec Century Bright Capital Investment – during the institutional bookbuilding, bringing the total number of cornerstones to seven and increasing their combined investment to $360 million from $280 million. Based on the final price, this means one-third of the deal went to cornerstone investors.
Sources said the Sinopec subsidiary, which is responsible for the Chinese oil refiner’s overseas treasury operations, was intended to be a cornerstone from the beginning, but hadn’t been able to secure the necessary regulatory approvals in time to be included in the red herring prospectus.
As reported earlier, the other cornerstones were state-owned Malaysian investment company Khazanah, pan-Asian insurer AIA, Sino Life Insurance, China Life Insurance, China General Technology (Genertec) and China Cinda (HK) Asset Management. They will all be subject to a six month lock-up.
Galaxy Securities sold 1.568 billion H-shares through the base deal, which accounts for 20.9% of the enlarged share capital. About 95.7% of the shares were new, while 4.3% were secondary shares sold by the National Social Security Fund (NSSF).
The split between new and old shares is the same for the greenshoe, which amounts to 235.1 million H-shares. If the greenshoe is exercised in full, the total deal size would increase to $1.23 billion.
Even without the shoe, this is the largest IPO in Hong Kong so far this year. However, Galaxy Securities won’t be able to keep that record for long since Sinopec Engineering is due to price an even larger deal this morning. The engineering and construction arm of China’s largest oil refiner, is seeking to raise between $1.7 billion and $2.2 billion and yesterday told investors that the price will be fixed in the lower part of the range, between HK$10.50 and HK$11. The shares were initially offered at a price between HK$9.80 and HK$13.10.
These two billion-dollar-plus deals have breathed new life into the Hong Kong IPO market, which was very quiet in the first quarter with just $1.1 billion of new listings. However, more and more issuers are now starting to test investor appetite and the next few weeks are expected to see several more deals launch.
Yesterday, Mando China kicked off the bookbuilding for an IPO of between $213 million and $270 million. The deal will comprise 75% secondary shares that will be sold by its parent company, Mando Korea, and 25% new shares. The listing candidate is a holding company for the China operations of Mando Korea and one of the leading suppliers in China of chassis-related automotive parts.
Also in the market right now is Great Eagle-sponsored Langham Hospitality Investments, which is seeking to raise between $510 million and $589 million from the listing of a hotel-focused trust. The trust, which is being brought to market by Deutsche Bank, HSBC and Citi, is offering investors a yield of up to 6.5%.
ABC International, Galaxy International, Goldman Sachs, J.P. Morgan and Nomura were joint global coordinators for Galaxy Securities’ IPO. They were aided by another 16 joint bookrunners, bringing the total number of bookrunners to 21 – a record for a Hong Kong listing, and not one that the involved parties ought to feel particularly proud of.
The other bookrunners were 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 were added just before the start of the bookbuilding.