Should China's CITIC Securities command a valuation four times that of Goldman Sachs?

The Beijing-based brokerage, China's largest, is looking to raise more than $3 billion in a Hong Kong listing, according to recent mainland media reports, emboldened by a more-than-doubling of its Shanghai-listed shares so far this year.

That rally has given CITIC Securities a valuation of 9.9 times its 2007 per share book value of 6.20 yuan, according to estimates by two analysts, compared with 2.6 times for Wall Street's Goldman Sachs, which many consider to be the world's top securities house.

The trouble they're going to have is pricing a deal, said an investment banker in Hong Kong.

CITIC Securities is a key beneficiary of the more than 50 percent rise this year in Shanghai's benchmark composite index, a surge that has seen Chinese individuals opening brokerage accounts at a rate of 1.2 million a week, compared with 3 million for all of 2006, and made for lofty valuations.

Domestic A shares in dual-listed firms trade at an average premium of about 90 percent to their Hong Kong-listed H shares.

Shanghai shares in CITIC Securities trade at about 60 yuan, a forecast price-to-earnings ratio of more than 32 times.

If CITIC Securities went to Hong Kong for an IPO today, its H-share price would be HK$30 or even HK$40 apiece, which is definitely too high for Hong Kong investors, said one investment banker in Shanghai.

But there is no solution. CITIC Securities' A-share price is so high, it cannot have too cheap a Hong Kong price, or its mainland price may be hurt, he said. It's actually a bit awkward.

If CITIC Securities priced its Hong Kong offering as low as HK$30 -- a discount of roughly 50 percent to its Shanghai shares -- its deal would be valued at about 16 times 2007 profits.

By comparison, Goldman Sachs trades at 11.1 times forward earnings.

Bankers said global investors would have a hard time betting on shares of a company linked so closely with China's domestic stock market, which many consider to be poised for a correction.

While Chinese banks have attracted tens of billions of dollars from global investors, a $3 billion listing from a mainland brokerage seems a tall order to some watchers given the firm's smaller size and the volatile nature of its business.

CITIC Securities earned 1.25 billion yuan ($164 million) in the first quarter, up 10 times from a year earlier.

Merchants Bank Co. , China's biggest non-state lender by assets, only raised $2.4 billion in a Hong Kong IPO last September, although its 2006 earnings were 7.11 billion yuan, or an average of 1.78 billion yuan per quarter.


Timing is uncertain for a Hong Kong listing by CITIC Securities, an arm of top financial conglomerate CITIC Group, although the firm will wait to complete its pending sale of up to 350 million domestic shares to fund expansion, a mainland banker close to the company said.

CITIC Securities, which has won underwriting nods for domestic IPOs from Bank of Nanjing, Bank of Beijing and Bank of Dalian, has not yet picked a Hong Kong underwriter.

Citigroup Inc., the largest financial services firm, could edge rivals like UBS, Merrill Lynch and Morgan Stanley after signing a strategic cooperation partnership last week with CITIC Securities, according to industry sources briefed on the situation.

The partnership between Citigroup and CITIC Securities currently has no equity investment component, but people in the market say the New York-based giant may buy a stake in the Chinese broker when it lists in Hong Kong.

Citigroup and CITIC Securities declined to comment. ($1=7.63 Yuan)