Banking & Finance

Far flung Galaxy

Hong Kong, not Shanghai, for broker’s IPO

Heading south

At more than 13 billion light years from earth, scientists in California say they have just discovered the most distant galaxy yet, thanks to the Hubble Space Telescope in California.

Somewhat nearer to home is news that one of China’s leading brokerages, Galaxy Securities, has dropped its previous plan for a Shanghai listing. Instead it will pitch its investment story to fund managers a mere 760 miles to the southwest, in Hong Kong.

Despite its original intention for a simultaneous listing in the two cities, Galaxy will now pursue an IPO in Hong Kong alone, probably in May, reports 21CN Business Herald. Insurance giant PICC did something similar last September, dropping plans for a dual listing with Shanghai and WiC has also written recently about property developer Vanke, migrating its Shenzhen B-shares to Hong Kong (see WiC178).

So what does it say for the prospects for Chinese IPOs when the country’s third largest brokerage by turnover (and the biggest in branch numbers) can’t be bothered to wait any longer for a China listing? Galaxy even counts Central Huijin, the state-owned investment fund, as a key shareholder. Apparently, even this wasn’t enough to jump the stalled IPO queue (see WiC177).

Galaxy’s flotation also comes after “five lost years” for the Chinese broking industry, according to research published recently by York Pun and Todd Dunivant at HSBC. Since the peaking of the A-share market in Shanghai in 2007, total assets held by brokerages have declined by 9% due to customers losing interest in domestic stocks. By contrast, over the same period trust companies have increased their assets under management more than five-fold, by offering high yielding wealth management products (see WiC177 for more on these).

So the immediate impression is that Galaxy’s management doesn’t expect to see much sign of life in China’s IPO market for the foreseeable future (see WiC179 for how the same trend is hurting Chinese private equity too). Instead the plan is to follow in the footsteps of Citic Securities and Haitong, two Chinese brokers which listed in Hong Kong (Galaxy hoped to raise $1.9 billion but its IPO will likely be smaller without the Shanghai portion).

Like most of its peers, Galaxy has been suffering from sharp declines in brokerage and underwriting income. So why list now? With more than a hundred brokers active, a period of consolidation looks possible, although HSBC says that this isn’t going to happen quickly. That’s because regulations prevent ownership of multiple brokerages, and many firms are owned by local governments, which won’t want to sell. Instead, Galaxy may want to position itself for longer-term trends that HSBC expects to favour the industry, including higher incomes and an ageing population. In the shorter term, there are also new policy priorities from the China Securities Regulatory Commission (CSRC) that should benefit brokerages, like more relaxed capital rules, greater access to margin financing and wider scope for brokers to develop their own asset management products.

HSBC also expects to see more brokerages expanding into wealth management, adding Rmb15 billion in extra revenue to the sector by 2015. With policymakers keen to reduce the dominance of the banks, brokerages look like getting a bigger role in diversifying risk across a wider range of financial institutions. Still, whether the trend strengthens the investment case for the Galaxy IPO must be debatable. Fund managers will be poring over the risks inherent in the push into wealth management products, in deciding whether to back the offering.

The concern? Simon Rabinovitch of the Financial Times was already warning last week that brokerages have raced into shadow financing, and that they now manage almost Rmb2 trillion ($320 billion) of entrusted funds passed on by the banks, up seven-fold over last year.

The fear is that the credit problems being circulated around China’s shadow banking sector will lead to a blow-up sooner or later. Brokerages could then be left holding some of the losses.

“It’s something that people should pay attention to. But it’s not alarming yet,” an unnamed analyst told the Financial Times.


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