Guotai Junan seeks $296 million from Hong Kong IPO

The Hong Kong arm of the Chinese brokerage firm will compete for investor attention with Agriculture Bank of China, which is set to start bookbuilding its H-share tranche tomorrow.

Guotai Junan Securities' Hong Kong division started bookbuilding yesterday for an initial public offering that could allow it to raise up to HK$2.31 billion ($296 million).

The fact that the firm, known as Guotai Junan International, is launching its Hong Kong offering in the same week as Agriculture Bank of China's (ABC) massive IPO has triggered some concern that it will need to compete with the big lender for investor interest. ABC, which is expected to raise more than $22 billion, is set to start taking orders for its A-share tranche today and for its H-share tranche tomorrow.

However, sources say Guotai has planned a share sale for a long time and is confident about going ahead. For one, the company had firm order indications from a number of investors before launch.

Guotai is looking to raise between HK$1.59 billion and HK$ 2.31 billion ($204 million to $296 million) by offering 410 million shares, or 25% of its enlarged share capital, at between HK$3.88 and HK$5.63 per share. The price range translates into 1.9 to 2.3 times its estimated 2010 book value, bankers involved in the deal said.

Chinese brokers generally trade at 1.8 to 3.3 times their 2010 book value and 1.7 to 3 times their 2011 book value. Their counterparts in India trade at 1 to 3 times, while in Korea brokerage firms are generally quoted at 1 to 1.5 times book.

The offering comes with a greenshoe option of 10%, which, if fully exercised, will allow the company to sell an additional 41 million shares and increase the deal size to as much as $326 million.

The price will be fixed in the afternoon of June 30 and the stock will start trading on July 8. The sale is being arranged by HSBC, ICBC International and UBS. The firm's parent, Guotai Junan Securities, is also managing the deal.

The company will use the proceeds from the offering to invest in its online trading platform and to provide more leverage products to clients.

Guotai has 16,000 active clients in Hong Kong -- a small number compared with local rivals, such as Taifook Securities which was bought by Haitong Securities last year and has a total of 130,000 clients. But Guotai can also make use of its parent group's huge customer base of 2.5 million active clients, sources familiar with the situation said. About 90% of Guotai's clients are mainland residents who invest in the Hong Kong stockmarket via the firm's online trading system, which allow them to conduct real-time trading in securities and to subscribe for shares in Hong Kong IPOs.

The company established its online trading platform in 2001 to support securities dealing and broking via the internet. Internet trading accounts for approximately 84% of the group's trading volume, Guotai said in a preliminary IPO prospectus.

The company made a net profit of HK$298.3 million in 2009, 137% higher than the HK$126.0 million in the previous year.

The leading securities firms in China are competing to expand their operations to Hong Kong in an effort to gain international exposure. The top 20 mainland brokerage firms have all set up operations in Hong Kong, an executive at Haitong said.

However, of China's 107 brokerage firms, Shenyin Wanguo Securities is the only one to have listed its Hong Kong operations in Hong Kong.

Guotai is not the only Chinese financial issuer fighting for attention with ABC. Earlier this month, Bank of Communications kicked off a rights issue of A- and H-shares that could raise up to $4.84 billion. 

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