Undervalued CICC banks on Hong Kong IPO pickup

China’s largest underwriter of Hong Kong listings helped its clients to raise $3.84 billion last year, as it reportedly gets set to sponsor another blockbuster IPO by battery giant CATL

Key Takeaways:

• CICC said its net profit rose between 50% and 70% in the first quarter, as it capitalized on rebounds in the Hong Kong IPO and stock markets
• The leading investment bank’s valuation is significantly lower than its U.S. peers due to its weaker return on equity

By Bai Xin Rui

Stock markets in Hong Kong, Shanghai and Shenzhen have been on a roll the last two quarters, buoyed by Beijing’s nearly nonstop efforts to support a flagging Chinese economy. The resulting euphoria has not only lifted many shares, but also rekindled a stalled IPO market, to the relief of investment banks that rely on fees from new listings as a major revenue source.

That lift was a major engine behind a recent positive profit alert from leading Chinese investment bank China International Capital Corp. Ltd. (3908.HK; 601995.SH), or CICC, which forecast its profit jumped up to 70% year-on-year in the first quarter.

CICC made financial history at its founding in 1995 as China’s first foreign-invested investment bank, signaling the country’s intent to enter the investment banking big leagues. Its initial investors included global giant Morgan Stanley (MS.US) and Singapore’s GIC, alongside domestic majors like China Construction Bank (0939.HK; 600939.SH) and the China National Investment and Guaranty Corp. It was the first Mainland investment bank in Hong Kong with its entry to the market in 1997, and helped to underwrite the landmark IPO by leading wireless carrier China Mobile that year. In later listed itself in Hong Kong in 2015, and went public in Shanghai as well in 2020.

According to its announcement earlier this month, CICC said it expects to report a net profit of between 1.86 billion yuan ($254 million) and 2.11 billion yuan for the first quarter of 2025, up between 50% and 70% year-on-year. It attributed the jump to similar revenue increases for its wealth management and securities businesses, but provided little additional detail.

The company’s revenue comes primarily from three sources: transaction fees and commissions, interest income and investment proceeds. Transaction fees and commissions accounted for 40% of its total in 2023 and 2024, followed by interest income at nearly 28% both years.  

The company charges transaction fees and commissions in its brokerage, investment banking and asset management businesses. Its brokerage arm mainly buys and sells securities for clients, while its investment banking arm underwrites equity financing such as IPOs and secondary offerings, as well as debt and structural financing. It also has an arm that collects fees from providing asset management services.

The strong stock market rallies in Hong Kong, Shanghai and Shenzhen were obvious catalysts for the company’s brokerage business in the first quarter. But its investment banking arm that caters to IPO clients is also an important contributor, providing 9.6% and 11.2% of the company’s total revenue in 2023 and 2024, respectively. CICC’s strongest suit is in helping Chinese enterprises list overseas, with Hong Kong often as their preferred location.

CICC participated in 19 such listings in Hong Kong last year that raised a cumulative $3.84 billion, making it the market’s top player for such fundraising. Its clients included home appliance giant Midea Group, Mao Geping Cosmetics and bubble tea chain Chabaidao, to name a few. Among its listings, the company was the bookrunner or main underwriter for nine of the deals it helped to list, ranking second in that category, helping its clients to raise close to $1.25 billion.

CICC also has global aspirations and is active outside the Mainland and Hong Kong. Last year it helped three companies to go public in New York. The total value of listings for which it was the main underwriter reached $87 million, enough to make the company China’s top securities firm in that regard, but also showing how limited Chinese underwriters have been in their quest to become truly global players.

While Hong Kong IPOs boomed toward the end of last year, a more muted performance in the A-share markets in Shanghai and Shenzhen translated to only six projects in which CICC was the main underwriter last year, down by 11 from 2023. Its fundraising for those clients totaled 3.59 billion yuan ($492 million), down by nearly 90% year-on-year and accounting for only 5.3% of the value of deals completed on the A-share markets last year. It competes with a big field of well-established domestic underwriters at home, with the result that it was only the eighth largest underwriter for new A-share listings last year.

Rebounding Hong Kong IPO market

In stark contrast to lethargy on Mainland stock markets last year, where the regulator has slowed new listings to support the market, Hong Kong IPO activity has taken off since last fall. A total of 15 IPOs were completed in the market during the first quarter, raising a total of HK$17.7 billion ($2.28 billion), up fourfold year-on-year and the highest first-quarter level since 2021, according to accounting firm KPMG. As many as 120 companies have filed for Hong Kong IPOs so far this year, 34 more than the 86 in the pipeline at the end of last year.

The bustling market has generated strong demand for CICC’s underwriting services. Among those, the company has reportedly been selected as one of the cosponsors for a massive Hong Kong listing by battery giant CATL, whose shares are already traded in Shenzhen, which could raise $5 billion or more. It was also an underwriter for Chinese premium tea chain Chagee’s U.S. listing that raised $400 million last week. The company’s strong international ties also make it a strong candidate for future listings by companies like fast fashion sensation Shein, which is reportedly preparing to list in London, and Alibaba’s Ant Group financial affiliate.

While CICC’s profit fell by 7.5% last year to 5.69 billion yuan, the figure is expected to return to positive growth this year on momentum in the company’s major markets, according to Bloomberg data. Analysts expect the company’s net profit to grow by 20.7% this year to 6.87 billion yuan. CICC’s Hong Kong stock currently trades at a price-to-book (P/B) ratio of 0.57 times, much lower than foreign peers like Goldman Sach (GS.US) at 1.4 times, Morgan Stanley’s 1.7 times and JPMorgan’s (JPM.US) 2 times.

That said, CICC’s expected return on equity (ROE) stands at just 6.6%, compared with figures in the 13% to 15% range for Goldman Sachs, Morgan Stanley and JPMorgan. Such underperformance could explain CICC’s lower P/B ratio than its foreign peers, which is a problem common to Chinese companies with low valuations. Accordingly, CICC will need to raise its profitability and ROE if it hopes to catch up with its international peers.

To subscribe to Bamboo Works weekly free newsletter, click here