CICC unveiled its A-share IPO proposal last Friday, which will enlarge its total share base by 9.5%. We believe this is a positive move to alleviate short-term capital pressure for CICC’s fast expanding balance sheet business as well as to establish a more effective channel for future fund raising. Near-term EPS and ROE dilution would be inevitable, but its strong capability in capital utilization could help reduce the actual negative impact. Maintain BUY.
- A-share IPO proposal details: On 28 Feb, CICC proposed to issue max. 458.6mn new A-shares through A-share IPO on Shanghai Stock Exchange. The offering size is equivalent to 9.5% of enlarged share capital. The offering price is not yet determined. CICC will use the proceeds to replenish its capital and enhance its capability of utilizing the balance sheet to offer complex products. After A-share IPO, Huijin will remain the largest shareholder of CICC, holding 40.2% of total issued shares, based on our estimates.
- An essential move to quench short-term capital thirst and to support longer-term business expansion. CICC had boosted its capital through two H-share private placements in Mar 2018 and Oct 2019 after its acquisition of CISC, increasing 9.6% of its share base. But due to its high capital utilization, we still estimate its active leverage to reach at ~6x by YE FY19E, close to regulatory cap. The A-share IPO would relieve the Company’s short-term capital pressure. In addition, A+H listed brokers are apt to replenish capital through A-share placement as they trade at higher valuations (1.62x 1-yr fwd P/B vs. 0.69x of H-share); The A-share listing would provide CICC with a more effective way to raise fund to fuel its business growth in the longer run.
- ~9% dilution on FY21E EPS/ROE, but actual impact may be milder. Assume that the offering price will be equal to CICC’s latest H-share closing price and the IPO will be completed by YE FY20E, we estimate the FY21E EPS and ROE dilution would be 9.5% and 8.7%, respectively (Fig.1). Given the Company’s strong balance sheet utilization through businesses such as OTC derivatives, and good track record of leverage and ROE change after H-share private placement in 1Q18 (Fig. 4-5), we believe the dilution impact would be manageable.
- Maintain BUY. CICC’s share price performance was depressed after latest H-share private placement and now trades at 1.11x 1-year forward P/B, 7% below its historical average (1.19x). We maintain BUY on CICC with TP at HK$ 17.2 and as one of our top picks, for its leading position in investment banking business and institutionalization.
