QUICK NOTE: China Brokers Share Issuance: CITIC Secs gets CSRC OK to issue US$6bn

While not unexpected, the train chugs on....

China brokers continue to issue equity, and launch IPOs.

After GF Securities (1776 HK) launched a US$4bn H-share IPO in April which was up 30+% on Day1, China Galaxy Securities did a HK$24bn (US$3.1bn) top-up on its H-shares in early May (now up 10% since then), and Huatai/HTSC launched a HK$40bn (US$5.15bn) offering (including greenshoe) as its As climbed even higher, CITIC Securities received approval Friday from the CSRC to issue up to 1.5bn new H-shares (going along with the announcement dated 28 Dec 2014, the Circular dated 14 Jan 2015, and the A-share EGM 16 February 2015).

That's $6.25bn if placed at a 5% discount to Friday's close.

This announcement does not necessarily mean an offering is imminent - CITIC would still need permission from the HKEx - but it clears the way for a mega offering.

CONCLUSIONS

• This would be a BIG offering at US$6bn.
• This adds to the overhang of China broker issuance. There has been a fair bit year-to-date, and there is a fair bit more to come.
• As described in the piece on Huatai Offering math, broker issuance at a discount to As when ROEs are lofty means forward PERs are low. And those at the "front of the queue" in terms of issuance will have pro-forma issuance PBRs lower than peers.
• Brokers are still subject to the model of Comms x Market Valuation x Market Turnover x Total Leverage x The Dream. If you think those components are sustainable over the medium-term (especially expectations ("the Dream")), this deal would put CITIC H-shares at 2.1-2.3x book (vs 2.9x now) and something like 13x 2016 forecast earnings (assuming 10% ROE on the incremental capital raised) vs China Galaxy at 2.9x and 15.6x FY2016 PER and Haitong H-shares at 2.7x 2014 PBR and 13.5x consensus 2016 PER.
• Math is presented for a possible Offering.
• THERE IS NO PROMISE OF AN OFFERING TO MADE ISSUED BY THE COMPANY, BY MYSELF, NOR ANYONE ELSE TO MY KNOWLEDGE. I am simply extrapolating from current market expectations, announcements, and other brokers' behavior in recent issuance.