Guotai Junan IPO entices global institutions

At last: a Chinese IPO in Hong Kong which institutions believe has upside potential.

China's second most profitable brokerage company, Guotai Junan, allocated the institutional tranche of its Hong Kong initial public offering on Monday after attracting the kind of balanced order book syndicate bankers had almost give up on.

Bankers reported an oversubscription ratio of roughly three times for the institutional tranche, with participation from just over 100 accounts and a concentration ratio, which saw roughly 65% allocated to the top 10 investors.

Demand and allocations for the HK$16.47 billion ($2.12 billion) deal pre-greenshoe were unsurprisingly skewed towards China.

However, the deal also attracted strong interest from offshore hedge funds, and bankers said global long-only funds came in towards the end of the bookbuilding process as well.

 “It's very exciting to see a deal, which has been priced at a sensible level," one banker commented. "The recent stock market rally enabled it to happen and as a result, Guotai Junan has not only come at a discount to it A-shares, but also H-share comparables such as Citic and Haitong.

“That's the reason why there were a decent number of global long-only institutions in the book,” the banker continued. “They’ve been underweight Hong Kong and China for some time and this deal gave them an opportunity to try and rectify that.”

The institutional tranche will account for 95% of the deal since the Hong Kong retail offering did not trigger any clawbacks (more than 15 times covered), or clawforwards.

Post greenshoe, the final size is likely to be HK$18.94 billion ($2.44 billion), making Guotai Junan Hong Kong’s third largest IPO by a Chinese brokerage and its largest overall since Postal Savings Bank of China came to market last September.

However, whereas Postal Savings Bank's share price plummeted after 'official' support stopped, institutions are hopeful Guotai Junan will trade up straight away. This is what enticed them back into the primary market, although the progressive narrowing of the group’s A/H share discount during the one-week bookbuild did lead some momentum players to drop out.

Will the IPO discount hold till listing?  

Bankers said some hedge funds also hesitated over the deal’s extended settlement period. Thanks to Hong Kong’s Ching Ming public holiday on Tuesday, the trade date has been pushed out over a second weekend to April 11.

Key to a successful debut, will therefore, be the maintenance of an adequate discount over the coming week. 

Based on Friday's Rmb18.25 close in Shanghai, the Hong Kong IPO has been priced at an 18.8% discount to its A-shares on a forward price to book basis.

But the Shanghai stock has come under some selling pressure since the IPO order book opened on March 27. Over the course of the week, it fell 3.37% and did particularly badly on Wednesday 29 when it fell 3.21% on one day.

Likewise, its nearest comparables have also come under selling pressure in both Hong Kong and China.

Haitong Securities, China’s third most profitable brokerage, has been on a declining trend since March 20 in Hong Kong.

Since then, its H-shares have fallen 8.52% to Monday’s HK$13.12 close. Year-to-date it is down 1.35% to the same close.

In China, Haitong’s A-share price has been falling since March 16.

It is down 7.54% to last Friday’s Rmb14.60 close (there was no trading this Monday because of China’s two-day Ching Ming public holiday). Year-to-date it is down 7.3%.

Citic Securities, China’s most profitable broker, has fallen 2.84% since March 16 in Shanghai and is down 0.31% to Friday’s Rmb16.11 close.

In Hong Kong, its H-shares are down 5.27%% since March 21 to Monday’s HK$16.10 close, but is up 1.52% year-to-date.

Closing the valuation gap?

“Both Haitong and Citic are liquid stocks so a number of names went short in the hope of executing long positions in Guotai Junan,” one banker explained.

“A number of accounts also said they’d decided to rotate out of Citic and Haitong because they feel Guotai Junan is a strong company with the potential to close the valuation gap even further over the next couple of quarters,” the banked added.

At its fixed price of HK$15.84 per share, Guotai Junan has been priced on a consensus forward price to book multiple of 1.08 times compared to 1.16 for Citic and 1.13 times for Haitong.

When books first opened, this discount stood at 10% based on Citic and Haitong’s blended H-share average valuation. Based on Monday’s close, it stood at 5.9%.

Guotai Junan is currently trading at 1.33 forward book in Shanghai compared to 1.25 for Citic and 1.52 for Haitong.

When the order books opened on Friday 24th, it was trading at a 3.53% discount to their blended average. When they closed last Friday, it was trading at a 4.25% discount.

The H-share IPO has also been buoyed by Standard & Poor’s decision to place the group’s BBB credit rating on positive outlook. In a statement, released last Friday, the rating agency said the IPO has boosted the group’s risk adjusted capital by three percentage points.

Citic and Haitong also both have a BBB rating, but the former is on stable outlook and the latter negative outlook.

Joint sponsors for the IPO are Guotai Junan International, Bank of America Merrill Lynch, Goldman Sachs and Shanghai Pudong Development Bank international. 

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