Shanghai - China’s sudden halt to a frenzy of initial public offerings came at just the wrong time for underwriters Everbright Securities, Guotai Junan Securities and China Merchants Securities.
The trio are the firms with the largest number of IPOs in limbo - approved by regulators but yet to be completed - after the government imposed an indefinite suspension this month, data compiled by Bloomberg show. Each has three on hold.
With 38 companies’ share sales blocked before the underwriters could get them out the door, as much as $386 million in fees has evaporated for now, based on averages for deals in the first half. The missing revenue adds to the hit that brokerages face from China’s market turmoil, including a decline in the lucrative business of financing customers’ stock purchases and the potential for trading volumes to keep falling.
“The leveraged bull run in the first half was a bonanza to Chinese brokerages in almost every business line but that’s not repeatable,” said Scott Hong, a Hong Kong-based analyst at CIMB Securities. “Investors have already priced in weaker profit growth going forward. That’s why brokers’ shares are trailing.”
Citic Securities, the nation’s biggest brokerage, has tumbled 28 percent this year, compared with a 24 percent gain in the Shanghai Composite Index. State-backed China Life Insurance dumped 30 million Citic shares on July 10.
‘National service’
The biggest uncertainty now may be whether stocks have found a floor via a slew of government measures, from restricting sell-downs by major shareholders to supplying trillions of yuan to try to stabilise the market. While trading volumes have fallen from the peaks of this year’s boom, they remain elevated compared to past years’ levels.
The securities firms also face costs from what Bank of America terms their “national service,” contributing to government-led efforts to prop up the market. Twenty-one big firms have pledged a combined 120 billion yuan ($19.3 billion) for a stock-purchasing fund and promised not to sell their proprietary trading positions until the Shanghai Composite rises to 4 500. The index was around 4 000 on Tuesday.
“For sure there will be collateral damage along with the rescue efforts,” said Zhang Yanbing, a Shanghai-based analyst at Zheshang Securities. “As long as the market returns to stability, I think brokerages should be able to cope.”
Condiments, elevators
The IPOs that didn’t quite make it out the door include Bank of Jiangsu, a sale which may raise as much as 23 billion yuan, according to an estimate by Sinolink Securities. The offerings lined up by Everbright, Guotai and Merchants include Inner Mongolia Dazhong Mining, Qianhe Condiment and Food and Shenlong Elevator.
The local ventures of foreign firms including UBS Group and Morgan Stanley also have IPOs on hold.
The freeze comes after a record first-half for Chinese brokerages that saw industry profits rise 374 percent from a year earlier as an explosion in debt-funded stock purchases fuelled a market boom.
Now, the loss of momentum for the securities industry includes margin finance, the money brokerages loan for stock purchases, falling 37 percent as of Thursday last week from a June 18 peak of 2.27 trillion yuan.
Brokerages’ profitability may weaken significantly in 2016 because of a “possible decline in brokerage fees, margin finance spreads, and underwriting commissions, together with a spike in credit losses,” Liao Qiang, a Beijing-based analyst for Standard & Poor’s, wrote in a July 9 report.
Pre-Freeze Forecast
Before the IPO freeze, PricewaterhouseCoopers had forecast initial share sales could total 300 billion yuan for the year, from 146 billion yuan in the first half. It estimated that as many as 400 companies could tap the market.
Besides the 38 IPOs that had received regulatory approval, another about 560 await vetting by the China Securities Regulatory Commission - or the equivalent of about another $5.7 billion in fees. Estimates for fees were based on data compiled by Bloomberg showing an average size of $124 million for IPOs in the first half, with an average fee of 8.2 percent for underwriters.
Like booms and busts, a moratorium on IPOs is something that the Chinese securities industry has seen before. This is the ninth in the 24-year history of the market, according to the state-run Xinhua News Agency.
Bloomberg