You Know What They Say About Big Cornerstones

(Bloomberg Gadfly) -- Parting is never easy, which is something investors in Guotai Junan Securities Co. may find when the Chinese brokerage lists next month in Hong Kong.

Although not as large as Snap Inc.'s $3.9 billion share sale, Guotai Junan's $2.1 billion offering is one of the biggest this year. It's also cheap. The shares to be listed in Hong Kong have been priced at HK$15.84 ($2.04) each, 25 percent below where Guotai Junan's mainland China-listed stock was trading before order taking began earlier this week. According to Smartkarma analyst Ke Yan, that values Guotai Junan at about 1.06 times price-to-book, versus an average of 1.6 times for China's major brokerages.

The problem, though, is that Guotai Junan will have a relatively limited float, considering cornerstone investors and the Shenzhen and Shanghai governments own about half of the shares. Some 25 percent have committed to hold their stock for at least six months -- small compared with the figure of more than 75 percent for Postal Savings Bank of China Co., which debuted in Hong Kong in September.

It also isn't a group packed with "friends and family" or state-owned enterprises. Those sort of investors generally have little interest in selling even when their lock-up period expires. Keeping relationships intact is often more important.

In Guotai Junan's case, the cornerstone group taking up $598 million is made up of investors that largely make sense for a brokerage. Private equity firm Apax Partners has agreed to buy $388 million and Japan's Tokai Tokyo Financial Holdings Inc. is also a backer, throwing in $10 million. Bank of Communications Co. asset-management clients will invest $80 million. 

But there's another clump of buyers, and they've committed to a one-year

That leaves about $1 billion on the table for other investors to play with, giving Guotai Junan one of the smallest free floats of any brokerage listed in the city. That's slightly strange given Guotai Junan's size -- it's one of China's largest brokers by assets.

Lower liquidity skews trading, and it also means a lack of coverage by analysts. It's telling that Postal Savings' performance hasn't exactly been exemplary, a sign IPO size doesn't matter as much as turnover.

Guotai Junan's well-thought-out group of cornerstone investors is to be commended. But its bankers missed a chance to give institutional fund managers a larger role.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.