China's equity markets are in the gutter but looking up at the heavens. The initial public offering of China Galaxy Securities, the country's biggest broker, is a bet that what has gone down must at some point go back up. Launching the IPO of a brokerage seems counterintuitive at a time when China's investors are shunning stocks and regulators have imposed an embargo on domestic offerings.
Not only have trading volumes in mainland shares fallen 25 percent in the past year, but commissions have been shrinking too, as more than 110 securities companies scrap over a shrinking prize.
Investors are thus being asked to focus more on what might be than what was. Galaxy has shed 20 percent of its staff since 2010, as its pre-tax profit has fallen by half, and focused instead on bits of its business that aren't in the doldrums. As China's second biggest underwriter of enterprise bonds, Galaxy can at least tap into a market growing at more than 30 percent a year.
Securities companies in China are basically a leveraged bet on financial reform: even a small opening up of new markets can be significant for their revenue. Take margin trading. After the regulator said it would increase the number of stocks and funds that can be traded with borrowed money from 280 to 500, the amount of stock bought with leverage has shot up. Galaxy's lending to customers increased by 80 percent in the first quarter of 2013.
That leaves more to play for. Leverage among China's securities firms is only around 2 times, while global firms like Nomura and Morgan Stanley have leverage multiples in the teens. Galaxy's return on equity of 8.5 percent is already higher than listed rivals Citic Securities and Haitong - piling on more assets should juice that up.
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