Haitong Securities may be heading for a lukewarm launch – Asia’s biggest initial public offering this year is likely to price near the bottom of its indicated range, according to IFR. But investors in the Hong Kong issue may be overlooking Haitong’s potential, particularly if China keeps reforming its domestic markets and opening up its capital account.
While Western financial firms are trying to reduce their leverage, Chinese securities companies are looking to increase theirs. Haitong’s total assets in 2011 are just 2.3 times its equity, not including the $1.8 billion in new equity it is set to raise. By contrast, Nomura has a leverage ratio of 16. That means Haitong has much further to grow.
If China continues to push through financial reforms, the likes of Haitong will be major beneficiaries. The country’s 20-year old capital market is still small and simple. Equity offerings and bond offerings together were equivalent to just half of bank lending in 2011. The annual transaction value of equity derivatives in China is less than 5 percent of that of the United States, according to Haitong’s prospectus. China’s regulators recently tripled the number of stocks that can be traded on margin, which augurs well for Haitong, as it is the market leader in margin loans and securities lending.
A weak stock market has punished Chinese securities firms, but it has also forced them to learn new tricks. As Haitong’s brokerage revenues fell by 40 percent from 2009 to 2011, it doubled the amount of its investment banking revenues. Its overseas revenues have grown by four-fold since 2009, now making up 9 percent of its total revenues. Haitong is now one of the most global Chinese brokerage firms.
That’s not reflected in the valuation. If Haitong prices at the bottom of its indicative range, its shares would have a 2012 price-to-book ratio of 1.3 times, less than the 1.9 times at which its Shanghai-listed shares trade, and the 1.5 times book value of rival Citic Securities. That might explain why Haitong has already managed to sell around a third of the offer to “cornerstone” institutions.
Haitong failed to list in Hong Kong in 2011, so this is its second attempt. Investors may be focusing on its low returns on equity, which were just 10 percent in 2011. But if China’s financial reform remains a hot topic, the potential for brokerages like Haitong could be significant.