Brokers’ new issues sputter on low profits

City will remain the world’s largest market for offerings due to capital flows from the mainland

Financial analysts predict the mainland brokerage sector will remain positive despite a recent market sputter in which mainland financial institutions have had to lower their initial public offering target price.

China Merchants Securities Co, the investment banking and brokerage arm of State-owned conglomerate China Merchants Group, plans to raise as much as $1.47 billion in a share issue in Hong Kong, while markets are showing a strong riskaverse sentiment.

A number of Chinese mainland securities firms are preparing for a public listing in Hong Kong this year as the mainland markets remain sluggish since last summer’s market rout.InAugust,EverbrightSecurities raised HK$8.6 billion ($1.1 billion) in aHongKongoffering.BOCOMInternational Holdings, the overseas advisory arm of the Bank of Communications, also announced plans to go public earlier this year.

CMC’s IPO comes amid the company’s dismal performance this year. The broker, among the 10 largest in the Chinese mainland, reported a 69 percent drop in net profit during the first half of this year to 2.2 billion yuan ($330 million), due to shrinking investment returns and a decline in its brokerage and wealth management business.

A report from CCB International stated a positive view on the mainland brokerage sector, saying deleveraging could make the current policy-driven bull market healthier and more sustainable. State-owned enterprise (SOE) reform, financial reform and economic stimulus could provide catalysts to fuel industrial growth, CCB International’s analyst Lawrence Chen and Xie Yuan said in the report.

However, both equity analysts highlight that the sector will have two major risks: government policy missteps on regulation of the mainland capital market could disrupt the market and brokerage balance sheet are volatile due to market turmoil.

CMC said on Monday that it will issue 891 million H-shares at an indicative price range of HK$11.54 to HK$12.78 per share. Approximately 44.6 million, or 5 percent of the shares, will be allotted to retail investors while the remaining 846.7 million shares will be allocated in international offer.

The share application (IPO) will start from Sept 27 to Sept 30 and trading of CMC shares in Hong Kong will begin on Oct 7.

CMC has elicited 11 cornerstone investors to subscribe about 60 percent of the share issue. The investors include PICC Life Insurance, China Life Insurance, Fosun Group and Advance Data Service Ltd, which is wholly owned by Tencent Holdings Ltd Chairman Ma Huateng.

Edward Au, co-leader of the national public offering group at Deloitte China, predicts Hong Kong is set to be the world’s largest IPO market in 2016, supported by a strong pipeline of IPOs from mainland financial services institutions.