Guotai Junan raises $226 million from Hong Kong IPO

Strong retail interest boosts the retail tranche to 40% of the deal, while price sensitive global investors keep the price below the mid-point of the range.

Guotai Junan International, the Hong Kong arm of Chinese brokerage firm Guotai Junan Securities, has raised HK$1.76 billion ($226 million) from an initial public offering in Hong Kong after fixing the price below the mid-point of the range.

Sources said the deal was multiple times covered at the top end, but there were supposedly a few global long-only accounts that were unwilling to pay more than the HK$4.30 per share where the price was eventually fixed. And in order to keep them in the deal, the company chose to be less aggressive on pricing. The shares were offered in a fairly wide range between HK$3.88 and HK$5.63.

Still, the company was probably quite happy to get the deal out the door at all, given that the end of the bookbuilding (books closed on Wednesday) coincided with the worst trading day this year on Wall Street (Tuesday), which saw the Dow Jones index tumble 2.6%. A couple of Hong Kong IPOs have also been pulled in the past two weeks as investors have become more selective. Some may also have decided to save their money for Agricultural Bank of China's IPO, which is in the market aiming to raise as much as $11.4 billion from the H-share portion alone.

The sources said Agricultural Bank was never really going to have much impact on the institutional demand for Guotai Junan, however, since the two are different enough to attract different types of investors. Guotai Junan also had firm order indications from a number of investors before launch. However, there was some concern that the Agricultural Bank offering, which could potentially be the largest IPO in the world ever if priced towards the top of the range and the greenshoe is exercised in full, would dampen the retail demand. As it were, that did not happen.

In fact, retail subscription was quite strong at 51 times the shares on offer, or just above the 50 times needed to trigger a clawback that boosted the retail portion of the deal to 40% from 10%. If the subscription ratio had been below 50 times (but above 15 times), the retail tranche would have been increased to 30%. The institutional tranche was said to have attracted more than 50 investors.

The Hong Kong-based brokerage sold 410 million new shares, or 25% of its enlarged share capital. The deal features a 10% greenshoe that could increase the final deal size to as much as $249 million.

The final price translates into two times Guotai Junan's expected post-greenshoe book value for 2010, based on the consensus forecasts by the joint bookrunners. And while not obviously cheap, it does pitch the Hong Kong-based brokerage towards the low end of the 2010 price-to-book range of 1.8 to 3.3 times where its Chinese peers are trading. However, although China's top 20 brokers have all set up operations in Hong Kong to capture the increased investments by mainland retail investors in the Hong Kong stock market, only Shenyin Wanguo Securities has listed its Hong Kong operations.

And while Chinese brokers are having quite a tough year so far with the Chinese stock market being one of the worst performers in Asia, their Hong Kong counterparts are doing relatively better. Guotai Junan is also coming to market on the back of a 137% improvement in net profit last year HK$298.3 million.

The firm has 16,000 active clients in Hong Kong, which is small compared with local rivals, such as Taifook Securities, which was bought by China's Haitong Securities last year and has a total of 130,000 clients. However, Guotai Junan is also able to leverage its parent group's huge customer base of 2.5 million active clients in the mainland, sources familiar with the situation said. About 84% of the firm's Hong Kong trading volume is transacted via its online platform.

Even though it priced towards the low end of the price range, Guotai Junan's offering is still the largest IPO in Hong Kong since China Liansu raised $250 million on June 17. The other two IPOs that have managed to priced since then and the six deals that are currently on the road are all smaller than $120 million - some of them significantly smaller - which may partly explain the retail interest in the more liquid and better known Guotai Junan.

That said, Bank of Communications is also currently in the market with a rights issue that could raise up to $4.84 billion from the A- and H-share tranches combined. That deal is due to close on July 9, three days after the pricing of the Agricultural Bank IPO.

Liansu, a Guangdong-based producer of plastic pipes for water supply and drainage, priced its deal at the bottom of the offering range for a 2010 price-to-earnings multiple of six times, which was well below the industry average of 10 to 12 times. The deal was significantly less popular with retail investors than that of Guotai Junan, however, resulting in a retail subscription ratio of just two times. J.P. Morgan and UBS arranged that deal.

Guotai Junan's IPO was led by Guotai Junan Securities, HSBC, ICBC International and UBS.

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