China’s IPO resumption: more than what meets the eye

UBS | We believe the new proposed IPO process could improve liquidity and investor protection and is therefore a structural positive. IPO resumption would also mean some of the corporate would consider raising equity instead of bond and help channel some of the liquidity away from the bond market. We believe IPO resumption also indicates regulator’s stance on capital markets and we could see possibly more guidance on the restrictions on significant shareholders selling shares (due to expiry on 8 January 2016) as well as brokers treatment of the 20% net assets inv ested with the China Securities Finance Corporation (CSFC) and remain net buyers of the market at below 4500 points. We think a more gradual unwinding process as well as more transparency on these will carry positive implications to brokers’ share prices near term.

Secondary turnover and market activities remain the key

We maintain our view that H – share brokers valuation remain undemanding if investors are willing to look beyond near term volatility. In fact, we note that consensus have already forecast slo wing earnings growth in 2016E. If both daily turnover and margin finance can maintain over the Rmb1trn mark then we do see potential for consensus to upgrade.

Maintain preference for Haitong and HTSC

We maintain our preference for Haitong for more diversified revenue stream and HTSC for investors looking for beta. China Everbright is an interesting name given IPO resumption as it would mean earlier exits for its PE portfolio .

Statement of Risk

The highly competitive nature of China’s securities industry, coupled with potential competition from banks and other financial institutions, presents risks. Potentially intense competition could lead to a reduction in market share or lower commission/fee rates. Chinese brokers’ revenue is highly dependent on stock market conditions. Brokerage commissions, which account for a significant portion of revenue, are directly impacted by market turnover. Although investment banking, net interest income and other segments are not directly impacted, they are also largely affected by market sentiment. In addition, market volatility could reduce the value of a company’s financial assets, consequently lowering its book value. As the equity market is driven by complex fundamental and regulatory factors , they could also create uncertainty.