Guotai Junan Securities Co., China’s largest brokerage by revenue, is capitalizing on a world-beating stock rally by seeking $4.8 billion in the nation’s biggest domestic initial share sale since 2010.
Guotai Junan will sell shares at 19.71 yuan each, the firm told Shanghai’s stock exchange late Tuesday. The IPO will give it a market capitalization of 150 billion yuan ($24 billion), ranking it ninth among Chinese securities firms by that measure with a price-to-earnings ratio that’s about half the industry average.
The brokerage will use some of the proceeds to finance margin trading, a business that’s already swelled in size during China’s debt-fueled stock mania. Its IPO will bring the amount of stock sold by Chinese securities firms this year to a record $12.4 billion, giving them room to keep lending for stock speculation.
Securities firms “need money after expanding too fast in this round of the bull market,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., adding that “the market is nearing a peak.”
The Shanghai Composite Index rose slightly in morning trading on Wednesday, recovering from a two-day, 5.4 percent swoon.
With Guotai Junan’s IPO, equity fundraising by Chinese brokerages topped the record $9.9 billion that such firms raised in 2014, data compiled by Bloomberg show. Some firms are plowing money back into businesses that lend for customers’ share purchases or short selling.
“The stock market boom means brokerages will need a lot of money to support business expansions on many fronts including margin finance,” said Zhang Yanbing, a Shanghai-based analyst at Zheshang Securities Co.
This is the fourth IPO on the mainland to raise more than $1 billion in the past 12 months, following a three-year stretch where no initial share sales reached that size, Bloomberg-compiled data show. The government’s decision to end a moratorium on IPOs in January 2014 unleashed a capital-raising frenzy that’s seen a total of $35 billion of stock sold in Shanghai and Shenzhen since then.
Set up when two firms merged in 1999, Shanghai-based Guotai Junan earned 13.5 billion yuan in revenue in 2014, ahead of brokerages including Citic Securities Co. and Shenwan Hongyuan Group Co., according to the Securities Association of China.
Guotai Junan’s net income surged 198 percent in the first quarter from a year earlier to 2.84 billion yuan, according to its prospectus, which didn’t say when trading in the shares will start. Shanghai government arms will remain the firm’s biggest shareholders after the IPO.
Guotai Junan is selling the stock at a valuation of 23 times 2014 profit per share, the typical level approved by Chinese authorities, even as brokerages listed on the mainland trade at an average of 50 times.
While China’s stock boom has revived a securities industry that had sunk into a torpor, it has raised the risk of a repeat of the market bust of 2007 and 2008.
“Everyone is busy looking for the greater fool,” Hong Hao, chief China strategist at Bocom International Holdings Co., wrote in a report on Tuesday. “It is plain that China is in a bubble,” he said, adding that it showed signs of being in an advanced stage, with a crash looming.
Both Citic, the nation’s biggest brokerage by market capitalization, and Shenwan Hongyuan are among those raising more money. Citic may get as much as HK$27.1 billion ($3.5 billion) selling stock to 10 investors, including the Kuwait Investment Authority and Singapore’s GIC Pte, and Shenwan Hongyuan said June 12 that it planned to raise as much as $2.9 billion in a private placement.
— With assistance by Aipeng Soo, and Jun Luo