Banking & Finance

Not on the list

Brokers hope new rules will aid market revival

In a disappointing development for American dogs (and the occasional housewife, perhaps), the US mailman may not be delivering letters on Saturdays for too much longer. The radical proposal is designed to cut costs at the US Postal Service, an organisation that lost $5.1 billion last year. But if the American post office looks to be in trouble, quite the reverse seems to be the case in China.

In fact, China Postal is aiming to raise Rmb9.98 billion ($1.58 billion) from the Shanghai bourse later this year. The Wall Street Journal says this will make it China’s biggest IPO of 2012, positioning the delivery firm among a “growing list of state-run firms eager to tap a slowly recovering domestic stock market”.

Announcements about big IPOs are good news for Haitong Securities. After all, Haitong earns much of its revenues from new listings, since it is a top domestic arranger. Hence the China Postal plan will also be of interest to international investors, especially those who bought into Haitong’s Hong Kong IPO which priced last Friday.

Evidently there are plenty of foreign investors who want more exposure to China’s brokerage market and view positively the prospect for more IPOs in Shanghai and Shenzhen. In a vote of confidence from foreign portfolio managers Haitong raised $1.7 billion, making it the world’s biggest IPO so far this year. Haitong is China’s second biggest securities firm by assets and follows in the footsteps of China’s top broker Citic Securities, which last September also listed in Hong Kong.

Haitong decided to postpone its stock offering last December due to market conditions that saw weak demand from cornerstone investors.

But why are China’s brokers choosing to list in Hong Kong? Most are already listed in the local A-share market, but Wang Dali, an analyst with Southwest Securities says they need access to new sources of funding. Hong Kong has been the world’s busiest IPO market for the past three years, and its geographical location, as well as social and cultural background attract domestic firms striving to internationalise their businesses, Wang adds.

Last July Guotai Junan Securities listed its own subsidiary, Guotai Junan International Holdings, in Hong Kong and KPMG calculated last June that 23 Chinese securities firms now have subsidiaries in Hong Kong (compared with 10 in 2006).

Conditions back across the border hardly indicate a vibrant sector, with the leading 15 listed securities firms reporting an average revenue drop of 36.6% in 2011, and an even steeper 40.1% decline in net profit. A sluggish stock market hasn’t helped, resulting in less trading.

But the investors buying into Haitong’s IPO seem to be betting that things have bottomed out and that the fortunes of the Chinese brokers are set to pick up.

Mainland investors were also more optimistic, after an announcement on Monday that both the Shanghai and Shenzhen Stock Exchanges have proposed new rules for delisting poorly performing stocks. This was interpreted as another move by the reformist head of the CSRC, Guo Shuqing (see WiC139) to clean up the stockmarket and turn around sentiment toward Chinese equities.

Under the newly proposed rules, a listed stock with negative net asset value for two fiscal years will automatically be delisted. The Shanghai Stock Exchange is also proposing a further test: if a company makes an operating income of less than Rmb10 million for four consecutive years, it will also face delisting.

The 21CN Business Herald calculates that there are 20 companies who fit the criteria for immediate delisting. The new rules show the regulator wants to give “full play to the market itself” and “encourage the ‘survival of the fittest’,” Li Daxiao, head of Yingda Securities Research Institute told Xinhua.

He’s right. One of the things that has put local investors off the stock market in recent years is the perception that many listed stocks are low quality. If more zombie companies can be delisted (and more blue chips can IPO), that image may change.

HSBC’s China strategist Steven Sun believes Guo’s progress on reforms could lead to a long term re-rating of local stocks.

“We reiterate our bullish stance on the A-share market and our year-end target of 2,800 for the Shanghai Composite Index,” Sun wrote earlier this week.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.