23 April 2019
Guangfa Securities' Hong Kong share sale is 45 times oversubscribed. The company is expected to price the IPO at a steep discount to its A shares. Photo:
Guangfa Securities' Hong Kong share sale is 45 times oversubscribed. The company is expected to price the IPO at a steep discount to its A shares. Photo:

Why Guangfa IPO is being offered at a steep discount

Guangfa Securities, China’s fourth largest brokerage, has attracted a big number of investors for its Hong Kong initial public offering.

The broker is expected to price the shares at HK$18.85, the top end of an indicative range, or a 42 percent discount to the 25.80 yuan (US$4.15) closing price of its mainland-traded A shares on Thursday.

That’s why the IPO is so attractive. On Wednesday, the first day of subscriptions, it drew 45 times more subscriptions than there were shares on offer.

The subscription period ends on March 30.

Guangfa Securities, Citic Securities (06030.HK), Haitong Securities (06837.HK) and Guotai Junan Securities (01788.HK) are the top four brokerages in China.

Their combined market value has risen above 1 trillion yuan after a recent A-share rally.

The market capitalization of Citic Securities, the nation’s largest brokerage, has surpassed that of Deutsche Bank and Credit Suisse, making it the world’s No. 4 brokerage behind Goldman Sachs, JP Morgan and UBS.

Stock trading has become a lot easier with rapid advances in technology.

Most people simply add a securities account to their existing bank account rather than go through a securities company.

As a result, most traditional securities companies have been forced to cut commissions and offer steep discounts to attract new customers.

By contrast, mainland brokerages continue to generate revenue from traditional securities trading and brokerage business.

They are very lucky in that sense and it’s all mainly because of the unique circumstances of China’s brokerage market.

At present, mainland banks, insurance companies and other financial institutions are prohibited from securities trading.

Investors have no choice but to use traditional brokerages such as Citic and Guangfa.

However, the good old days may be about to end.

The China Securities Regulatory Commission may open the brokerage industry to banks and other financial institutions in the next year or so, according to market sources.

Meanwhile, China’s major securities firms are struggling to diversify into investment banking, wealth management and other new areas.

All these new businesses need massive capital injection.

China’s biggest brokerages have taken advantage of a robust market to raise money for their planned diversification.

Guangfa Securities is the only one of the top four Chinese brokerages not yet listed in Hong Kong.

It’s rather late to the party, a fact that will be reflected in its pricing.

The prospectus shows that the company intends to use 50 percent of the IPO proceeds to expand its margin trading, internet financing and wealth management businesses.

About 20 percent will go to investment banking and other segments.

With its Hong Kong IPO, Guangfa Securities will gain access to offshore financing which will open the door to future issuances at peak valuations if the A-share market sustains the rally.

For its Hong Kong IPO, the top-end pricing translates into a price-to-earnings ratio of 14 times.

Investors can take some short-term bet on the stock to benefit from the broad A-share rally.

But they have to be selective when taking a long-term view. They should examine the business strategy and management execution capability very carefully.

This article appeared in the Hong Kong Economic Journal on March 27.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe