Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Investors in China may rue Beijing's clampdown on capital outflows but as the frenzied buying of domestic initial public offerings shows, there's never been a better time to underwrite one.

That's good news for Guotai Junan Securities Co., which plans to raise as much as $2 billion from a listing in Hong Kong that could be one of the city's biggest since Postal Savings Bank of China Co. went public in September.

Investors tend to rate brokerages more highly than bad-loan plagued Chinese banks, which typically trade at less than one time book. Citic Securities Co. in Hong Kong trades at a multiple of 1.2, for example, but the premium isn't saying much. Securities firms face a whole slew of challenges, including intense competition and falling commissions. China had a staggering 8,861 brokerages as of Sept. 30, versus 5,785 at the start of 2014.

Plus, in a market renowned for its booms and busts, share-trading firms often get called on by authorities to rescue tanking stocks. Guotai Junan says it contributed about 17 billion yuan ($2.5 billion) to the government's bailout fund in 2015, equivalent to one-fifth of its net assets at the time. Combined with a disappointing showing so far for a trading link between Hong Kong and Shenzhen, it's little wonder brokerages aren't posting glowing earnings.

Going for Broke
Guotai Junan's net profit slumped as stocks in China oscillated
Source: Bloomberg

Luckily for Guotai Junan, which is also listed in Shanghai, the IPO market in China is buzzing. Around the same time Beijing limited the use of yuan for offshore acquisitions and cracked down on other capital outflows, it started accelerating share-sale approvals.

New listings on the mainland have always been hot because of a rule limiting valuations to 23 times earnings, forcing companies to sell shares at levels below their listed peers. They've become hotter still as real estate lags and other investment avenues dry up. The amount of funds raised from first-time sales in Asia's largest economy is expected to reach the highest in six years in 2017, touching 225 billion yuan, according to the median estimate in a Bloomberg survey of analysts.

Buying shares of brokerages in Hong Kong as opposed to China is a cheaper way of getting exposure to the boom: Haitong Securities Co. trades at 1.3 times price-to-book in Hong Kong and 1.7 times in Shanghai.

Guotai Junan will have its work cut out competing with more established players for a piece of the underwriting pie. It still makes most of its money from broking, be it margin finance or commissions from trading stocks. For the nine months to Sept. 30, over half of Guotai Junan's revenue came from its brokerage operations and 18.4 percent from investment banking,  exchange filings show.

Catch Up Time
Guotai Junan was the seventh-largest underwriter of A-share IPOs in 2016
Source: Bloomberg

Still, so long as the yuan continues to be weak, it's a safe bet that investors will pile into IPOs on the mainland. Last year, when Shanghai stocks fell 12.3 percent, new shares rocketed 430 percent on average in their first month of trading, the most since at least 1999, data compiled by Bloomberg show. Those figures are bound to put a tailwind behind any brokerage.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That's up from about 5 percent in the first half of 2015, though.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net