HTSC takes $4.5b HK IPO on the road

Huatai Securities has enlisted 13 cornerstone investors including Tencent Chairman Pony Ma to subscribe to $1.9 billion worth of shares.

Huatai Securities begins the roadshow for its initial public offering in Hong Kong today, looking to raise up to HK$34.7 billion ($4.48 billion) on a wave of favourable market sentiment toward Chinese brokerages.

The IPO could be the largest listing in Asia so far this year, exceeding its peer GF Securities’ $3.6 billion offering (pre-greenshoe) in April.

The broker is selling around 1.4 billion new shares or 20% of its total share capital at a price range of HK$20.68 to HK$24.80. A 15% greenshoe could enlarge the deal size to $5.15 billion.

The price range for Huatai, also referred to as HTSC, equates to a 2015 forecast price-to-book of 1.66 to 1.87 (1.6 to 1.8 post shoe). This means the broker is selling the H-shares at a 28% to 33.6% discount to its A-shares, based A-shares’ current valuation of 2.5 times on a post money basis.

The discount to A-shares may seem tight when compared to the 60% discount offered by GF Securities, but bankers on the HTSC flotation are confident the valuation is attractive and the deal will be well received by investors.

Investors may also be consoled by the fact A-shares from the mainland brokerage sector have undergone a correction from historical highs since GF Securities started selling H shares in late March, thus narrowing the gap between the A- and H-shares of securities houses.

Moreover, while both Citic and Haitong Securities have seen their H-shares slip since late April, China Galaxy Securities shares have risen 8.4% since the day after its own recent $3.1 billion fundraising exercise in Hong Kong.

Shares of GF Securities, though flat of late, have surged more than 33% since the April 10 float, assuaging investors' concerns and sustaining interest in the sector.

Cornerstone investors’ response will be another selling point for the offering. The deal has attracted strong interest from institutions, with 13 cornerstone investors subscribing to $1.9 billion of the deal.

Private equity firms and funds such as Och-Ziff Capital, Myriad, Value Partners, Hillhouse and Sequoia Capital are among a pool of investors that includes Tecent’s chairman and CEO Pony Ma and Netease.

Large mainland financial institutions like Ping An, ICBC, Cinda and New China Life are also participating through their investment units, as is Taiwan-based Fubon, an active investor in HK IPOs including GF Securities' offering.

The size of cornerstone investments range from $50 million to $200 million; Netease, for instance, subscribed to $200 million worth of shares; Ma signed on for $100 million.

“I look forward to an increase of 10% to 20% in HTSC’s price in the first days after listing,” said a source close to one of the cornerstones. "Unless the market suddenly turns bad," he added.

HTSC is planning to price the deal on May 22 and list the shares on Hong Kong stock exchange's main board on June 1. 

The split between insitutional and retail tranches is 95% and 5% subject to the clawback mechanism, where retail tranche will be capped at 20%.

The broker plans to use 60% of the IPO proceeds to develop capital-based intermediary business, and the rest 40% equally to develop investment and trading business and other financial products, expand asset management and PE management businesses, boost overseas business, and for working capital and general corporate purposes.

Huatai Financials, JP Morgan and UBS are the joint global co-ordinators. The three are also joint bookrunners with ABC International, BNP Paribas, Citigroup, China Merchants Securities, Credit Suisse, Deutsche Bank, Goldman Sachs, ICBC International, Morgan Stanley and Nomura. 

Huatai's 2015 profitability is likely to refelct the big spike in recent trading volumes. As such analysts are forecasting a doubling in profitability from 2014's net profit of Rmb4.539 billion -- itself a doubling from 2013's Rmb2.03 billion. 

Huatai is China's largest broker by market share, capturing 7.9% of the market in 2014. Citic was second on 6%.

Furthermore, Huatai has shown the ability to expand its dominance, with its market share increasing to 8.3% in the first three months of 2015 from 5.5% over the same period in 2012. 

It ranks second in terms of margin finance with a 6.4% market share at the end of December compared to Citic's 7% in the same period.

 

A full list of cornerstones follows as:

1. Fubon Life Insurance ($200mn)

2. Hillhouse ($200m)

3. ICBC AM ($200m)

4. NetEase / Lei Ding ($200m)

5. New China Life ($200m)

6. Sequoia Gopher ($200m)

7. Value Partner ($150m)

8. Pony Ma ($100m)

9. Cinda Sinorock ($100m)

10. Och Ziff ($100m)

11. Ping An AM ($100m)

12. Heilan Home / Zhou Yanqi ($100)

13. Myriad ($50m)

The story has been updated to show the full list of deal arrangers and cornerstone investors.

¬ Haymarket Media Limited. All rights reserved.

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