China Securities Sector:Accelerated A-share approvals poised for investment banking growth

What’s new: China A-share IPOs surged in November-December 2016 on CSRC’s accelerated approvals, a trend we expect to continue in early-2017.

    What’s the impact: In 2016, the total number of IPOs reached 227 and issuers raised a total of CNY149.6bn, with both being the second largest totals in the past five years. A total of 79 A-share market IPOs came to market in November and December 2016 and accounted for 35% of total IPOs in 2016. These IPOs raised a total of CNY57.2bn, 38% of the total amount raised in 2016. Further, 30 IPOs have already been approved between 1-17 January, with a total proposed fund-raising amount of CNY12bn.

    We believe the China Securities Regulatory Commission (CSRC) has put behind its overly cautious stance on the stock market since 3Q15, and is trying to switch back its attention to market development from market control. Besides, we believe the CSRC has intentionally accelerated the pace of IPO approvals in order to shorten the large pipeline and play a better role in “strengthening the direct finance in the economy” given the macro environment. (See also Investment Banking to drive 2017E earnings recovery, dated 30 November 2016)

    As at 12 January, CSRC had 648 companies waiting for A-share IPO approvals. In all, we expect around 400 IPO approvals to raise more than CNY200bn in 2017. We look for IPO underwriting fees to increase by over 70% YoY in 2017, together with a decent rise in M&A advisory fees, leading to a solid growth in all underwriters’ investment banking revenues in 2017.

    What we recommend: China securities firms with a strong IPO presence should benefit most from accelerated IPO approvals, in our view. In terms of the underwriters, among our securities firms coverage, GFS (1776 HK, HKD16.82, Hold [3]) and CITICS (6030 HK, HKD16.0, Outperform [2]) currently have the largest number of deals in the IPO pipeline. They have 45 and 41 pending IPO applications in their pipelines, respectively. CITICS and Huatai Securites (6886 HK, HKD15.14, Buy [1]) hold the top 2 spots in league tables for total equity capital market fund-raising amounts in 2016.

    How we differ: While the increased IPO funding needs might result in negative sentiment for the secondary market, unlike the market, we believe that as the IPO fund-raising only made up about 11% of the total equity financing amount from the A-share market in 2016, the stock market would face only minor pressure if placement amounts were to come down slightly.