Guotai Junan IPO under magnifying glass

The Chinese brokerage's Shanghai initial public offering is likely to be the mainland's largest in five years.

Guotai Junan Securities, China’s third-largest stock brokerage by assets, has kicked off an initial public offering in Shanghai, which is likely to rank as the country’s largest flotation in five years.

The deal has been launched into a market still digesting the news that US index provider MSCI will delay including A-shares in its Emerging Markets Index. However, mainland investors appear to be shrugging the decision off, with the Shanghai Composite Index closing down a modest 0.32% on Wednesday when the delay was announced.

On Thursday, the index was back on a rising trend again, up 0.30%.

Guotai Junan also filed its prospectus with the Shanghai Stock Exchange on Wednesday after receiving regulatory approval from the China Securities Regulatory Commission the day before. According to the prospectus, the group will set the issue price for its deal on June 16, with bookbuilding commencing the following day.

Early indications suggest that Guotai Junan could raise up to Rmb30 billion ($4.84 billion) from the offering, which would make it China’s second largest domestic IPO behind Agricultural Bank of China’s dual $22.1 billion A-share and H-share listing in 2010.

These estimates are based on the group’s 2014 net profit of Rmb6.537 billion (ex non recurrent income and loss deductions) and expectations that it will offer 20% of its issued share capital at a multiple of 23 times earnings. The prospectus says this will comprise up to 1.525 billion shares.

The 23 times multiple is based on an unspoken ceiling the CSRC imposes on IPO candidates in an effort to curb secondary market volatility. And it means Guotai Junan’s A-shares could generate plenty of upside based on the current trading level of the group’s H-shares.

These are currently valued at 34.38 times earnings on a trailing twelve-month basis (ttm). On Thursday, the stock closed up strongly at HK$14.22, rising 4.41% on the day.

By contrast, fellow comparables Huatai Securities and Haitong Securities are trading at 19.54 times and 20.46 times ttm respectively in Hong Kong. Both are trading at a discount to their A-shares in Shanghai where Huatai is trading at 28.79 times and Haitong at 24.41 times ttm.

“Guotai Junan’s performance really stands out among peers,” says one Hong Kong-based equities trader. “I don’t think its Shanghai IPO will put pressure on the share price here as long as it keeps performing well.”

Guotai Junan is one of many Chinese brokers rushing to tap the equity markets to replenish funds, as stocks in Mainland China and Hong Kong keep soaring.  As of June 11, the Shanghai Composite Index is up 58.3% year-to-date.

Last month, Huatai Securities, China’s largest stock brokerage by trading volume, raised HK$34.7 billion ($4.5 billion from its Hong Kong IPO, after pricing the deal at the top of the price range. The transaction turned out to be tremendously well received by the market, drawing 800 institutional investors and a 270 times oversubscription ratio from retail investors.

“The stock market frenzy is definitely good news for IPOs since it’s very easy for almost any company to raise money now,” said a portfolio manager at another leading Chinese brokerage. “Guotai Junan’s IPO will certainly be crazily oversubscribed.”

Many believe the MSCI decision will also prove to be no more than a temporary setback.

“The new money committed by the inclusion would have been the icing on the cake,” comments one investment banker. “We will eventually join the MSCI club.”

Underwriters for Guotai Junan’s IPO are China Galaxy Securities, Ping An Securities and Huarong Securities.

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