Chinese brokerage IPOs

Chinese brokerages, having listed companies producing everything from medicine to cement, are taking the logical next step: going public themselves. Everbright Securities, the country’s 11th biggest by assets, plans to raise up to $1.6bn in what would be the sector’s first initial public offering in seven years. Lining up behind it are two more brokers, China Merchants Securities and Industrial Securities.

Why not? Markets are hot and new share issues – restarted last month after Beijing lifted a 10-month moratorium – are being gobbled up. Booming business has further burnished the brokers’ credentials. Turnover on the Shanghai stock exchange has quadrupled since last August. While the benchmark Shanghai Composite index has risen 90 per cent this year, the brokerage business has run even further ahead. Citic Securities, the industry’s listed giant, has seen its shares rise 112 per cent.

The industry is also in better shape, having restructured and diversified away from the mostly basic business models it sported only a few years ago, when many brokers were on their uppers. Several have fund management and private equity arms, with the former proving useful profit contributors. Citic Securities’ wholly-owned fund manager China AMC earned almost $200m last year, while the fund management arm partially owned by China Merchant made $35m. Both, according to Z-Ben, a consultancy, delivered healthy operating margins of 38 per cent.

Of course, all this froth is going as much to the heads of brokerages as it is to anyone else. Everbright is coming to market at a hefty 53 to 59 times 2008 earnings, compared with the 40 times on which Citic Securities trades. Still, Everbright’s issue will doubtless be heavily oversubscribed – ironic given that brokerage listings are a sure sign of toppy markets.

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