CICC announced yesterday to revise up its A-share IPO issuing size by 2.1x, equivalent to 24.77% of its enlarged total issued shares. This will lead to a significant EPS/ROE dilution in FY20E/21E, while we believe the increased fund raising plan could support CICC’s B/S expansion in a longer period and the Company’s unique competitiveness in underwriting mega deals and new economy companies could help mitigate this short-term impact. Maintain BUY.
Increases A-share IPO size by 2.1x to support faster expansion. On 20 Jul, CICC announced to increase the max. no. of new shares issued in A-share IPO from 459mn to 1,438mn (or from 9.5% to 24.77% of total issued shares after potential greenshoe). CICC’s adj. financial leverage already surged to 6.6x by 1Q20, based on our estimates, showing its high utilization of capital and it was indeed in need of a larger amount of capital replenishment to sustain B/S expansion.
Est. 7%/24% of EPS dilution in FY20E/21E. As CICC’s A-share IPO process is being advanced faster-than-expected, we estimate the issuance to be completed as early as in 4Q20E. Assuming the offering price to be equivalent to CICC’s latest H-share closing price, the max. fund raising size could achieve RMB 24bn. We expect the A-share IPO will dilute CICC’s FY20E/21E EPS by 7%/24%, and FY20E/21E ROE by 2ppt/3ppt, while will enhance its FY20E/21E BVPS by 10%/7% as its H-share now trades above 1x P/B.
Strong competitiveness in underwriting new economy deals to help with ROE recovery. Media reported yesterday that CICC would be one of the underwriters of Ant Group’s US$ 10bn Hong Kong IPO. With its strategic relationship with shareholders Tencent and Alibaba, we’ve already seen and are expecting more synergies in investment banking businesses. In addition, CICC was dominant in underwriting large deals (>RMB 10bn), Red Chips and pre-profit companies on STAR Market, and this competitive edge, together with potential business opportunities from SOE reforms, could underpin its ROE recovery post A-share issuance.
Maintain BUY and as one of our sector top picks. CICC now trades at 1.33x 1-year forward P/B, slightly higher than its historical avg. plus 1SD (1.29x), but we think this is justified with its unique strength in enjoying investment banking business opportunities in both domestic and oversea market. We expect the A-share IPO will support the Company’s capital demands for B/S expansion in a longer period and could drive further upside potential for H-share.
