Tuesday, October 4, 2011

CITIC Securities (Stock Code 6030.hk) IPO Stock Analysis

CITIC Securities Co. Ltd. (CITIC SEC), headquartered in PRC Guangdong Shenzhen, is a leading full-service investment banking business operator in the mainland China. CITIC Securities currently offer a wide range of institutional services including equity finance, debt underwriting and structured finance, securities underwriting and sponsorship, financial investment advisory and consultancy services, equity sales and trading, fixed income sales and trading, prime services, retail securities and futures brokerage, Collective Asset Management (CAM), Targeted Asset Management (TAM), Specified Asset Management (SAM), China AMC (Asset Management Company), multi-strategy proprietary trading and hedging, private equity, principal investment and fund management etc.

CITIC Securities A-shares (Stock Code: 600030.SS) have already been listed on the Shanghai Stock Exchange since 2003. Now it plans to introduce a H-share IPO (Initial Public Offering) to raise a maximum of RMB 16.75 billion (if the over-allotment option is fully exercised), by issuing up to 1.259 billion of H-shares (114.46 million of them are converted from existing A-shares). CITIC Securities H-shares (stock code: 6030.hk) will start trading on the Hong Kong Stock Exchange on 6 October 2011.

IPO cornerstone investors of CITIC Securities are the U.S. mutual fund Waddell & Reed Financial, Kuwait state-owned Investment Authority, Singapore Temasek Holdings Pte Ltd., Brazil investment bank Banco BTG Pactual S.A., Taiwan Fubon Life Insurance, and Och Ziff Capital Management Funds from the British Virgin Islands. After this IPO listing, the above cornerstone investors will be subject to a H-share lock-up period of 6 months. CITIC Group, the first stated-owned investment conglomerates in China, is the only substantial shareholder of CITIC Securities interested in at least 10% voting power at any shareholder meeting of CITIC Securities. After the H-share IPO listing and global offering, issued share capital of CITIC Group will at most be reduced to 20.63% from the current 24.15%.

Our detailed stock analysis of CITIC Securities is as below:

Profits (RMB thousands)Number of Ordinary Shares in issue (thousands)Earnings (in HKD) per Ordinary ShareP/E (Price/Earnings) Ratio

(Source of CITIC Securities IPO Prospectus: Hong Kong Exchange and Clearing Ltd - HKEx stock code: 388.hk)

RMB/HKD = 1.21


(1) We expect a profit drop in 2011 due to revenue declines in investment income as well as fee and commission incomes. Investment income from disposal of subsidiaries should decline as the divestment of a 51% majority equity interest in China AMC in 2011 may not compensate the gain (RMB 5.765 billion) on the divestment of a 53% equity interest in China Securities in 2010. It is because CITIC Securities has only completed divestment of a 31% equity interest in China AMC until August 2011 and hence the remaining 20% equity interest in China AMC will not be likely to divest favorably in the capital market downturn after August 2011. Fee and commission incomes should also decline as the mainland stock market transaction volume has been low in 2011, owing to the tighten monetary policy. Reference: No More Loose Monetary Policy. In particular, fee and commission incomes from asset management segment will be significantly reduced due to the divestment plan of the 51% majority equity interest in China AMC by the end of 2011 that CITIC Securities will have to deconsolidate China AMC's financial results from its 2011 (final) financial statements.

(2) The Stabilising Manager can exercise an over-allotment option (also called the greenshoe) to issue up to an extra 149.295 million H-shares on behalf of the international underwriters during the initial 30-day stock price stabilisation period. If the over-allotment option is fully exercised, number of ordinary shares in issue can reach 11.09 billion in 2011, 11.35% of which are the new H-shares and the rest 88.65% are the existing A-shares.

(3) We calculated the earnings of CITIC Securities as HKD$0.802 per ordinary share (basic and dilutive earnings are the same) in 2011. This valuation is subject to change by various risk factors. CITIC Securities is generally exposed to investment risks for possible downturn of China capital markets, regulatory policy risks and counterparty risks in China, operation risks in asset management business, liquidity risks under tighter credit markets or interest rate hikes, risks in offering new products and services in new markets, risks associated with its international investment banking expansion, and also to risks related to declines in the volumes of brokerage trading activities or reduction of its credit rating etc.

(4) Stock price to be set as HKD$13.3 per ordinary share, which is near the lowest end of the offer price range for this IPO. Our 2011 CITIC Securities forward Price/Earnings (P/E) ratio is calculated as 16.58 times, and is higher than 8.95 times estimated by CITIC SEC's own IPO managers or bookrunners. Our calculated P/E ratio is also higher than the average 15.2 times P/E of CITIC SEC's 11 Chinese brokerage competitors currently listed on the Shanghai Stock Exchange. Just for your reminder, a relatively high P/E ratio, although means more expensive, may still be justified if most investors recognize its leading position in investment banking and are willing to pay such premium. CITIC Securities, on the other hand, does not have any indicative dividend policy promised in the IPO Prospectus that allows investors to estimate its future dividends.

Usage of this H-share IPO funds:
(i) Around 65% will be used to acquire or establish overseas research teams, as well as to expand international sale and trading networks (such as margin financing).
(ii) Around 30% will be used to develop flow-based businesses, including foreign exchange, prime services, fixed income, structured product, and commodities businesses.
(iii) Around 5% will be used as working capitals or general corporate purposes.

Conclusion of our stock analysis is: Having considered all the above important factors, we do not recommend a buy for this CITIC Securities H-share IPO. We expect the stock price performance of CITIC Securities will be unavoidably affected by the recent stock market downturn amidst the escalating European debt crisis as well as the faltering U.S. economic recovery.

In a longer-term, we do expect CITIC Securities will be benefited from launching a series of new RMB-denominated trading and investment services as the Hong Kong offshore RMB centre continues to develop (reference: New Milestone For RMB Internationalization). New RMB new business opportunities should include RMB-denominated fund management services, and also trading business for RMB-denominated fixed income products and equity derivatives etc that will drive the expansion of Chinese brokerage and investment banking sectors as a whole.

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