China Renaissance Profits from Position as Leading Chinese Investment Bank

Company’s 2020 profit more than quadrupled as it underwrote mega-listings for names like Lufax and Beike Zhaofeng

By Doug Young

As we head into the fourth year of one of the longest IPO booms in recent memory, China Renaissance Holdings Ltd. (HKEx: 1911) has been a major beneficiary.

One of the nation’s largest and one of only a few listed investment banks, Renaissance just gave investors a late Christmas and Lunar New Year present, saying its 2020 profit more than quadrupled to just over 1 billion yuan ($155 million), as it feasted on fundraising by Chinese companies. That includes not only large IPOs but also venture capital rounds for startups.

“This positive profit update is largely attributable to an increase in operating profit from China Renaissance’s investment banking and investment management segments, combined with the company’s effective control of operating expenses,” the company said in a press release.

It cited several IPOs it underwrote, including a New York listing by real-estate services company Beike Zhaofeng, operator of the Lianjia chain, which raised $2.1 billion last August, an even-bigger New York listing by fintech giant Lufax that raised $2.4 billion last November and a Hong Kong listing by China’s number-two video-streaming company Kuaishou that raised $5.3 billion last month.

Those and others on its list reflect how 2020 was another banner year for IPOs, extending a streak that dates back to 2017.

In an earlier report on the broader 2020 IPO landscape, Renaissance noted the year got off to a rocky start, as the global pandemic caused stock markets to tank in January and February. But things kicked into high gear in the second half of the year, and markets never looked back. Globally there were 1,415 IPOs last year, up 36% from 2019, according to a PwC report. Those listings raised a combined $331 billion, representing an even bigger 66% year-on-year gain.

As one of China’s leading homegrown investment banks, Renaissance was well-positioned to capitalize on the boom, since many of the year’s top IPOs were by Chinese firms. The PwC report said mainland China and Hong Kong were Asia’s two largest IPO markets last year, accounting for 27% of funds raised. The U.S. was the largest, accounting for more than half of funds raised. But we should also remember that some of the largest U.S. new listings were by Chinese firms like Lufax and Beike Zhaofeng.

Positive Reception

While Renaissance’s Monday announcement shows a fourfold increase in full-year net profit, the company had a far stronger second half. Subtracting comparable figures in its first-half earnings report from full-year results, second-half net profit rose over eight times to 607 million yuan.

Market reaction to the news from China Renaissance has been positive, though the picture is a bit cloudier over the longer run. Company shares rose nearly 10% in Monday trade after it announced the big profit gain, though they gave back some of that on Tuesday morning.

Over the longer term, the stock has been a bit of a laggard. The company floated shares for HK$31.80 ($4.10) apiece in its 2018 listing and saw them drop steadily after, losing two-thirds of their value as of last May. They’ve come back strongly since then, though their Monday close of HK$28.80 is still about 10% below their IPO price.

In terms of valuation, the stock actually looks relatively in line with global companies from the sector. It now trades at a price-to-earnings ratio of about 15, which is roughly comparable to global peers that include Morgan Stanley at 12, Goldman Sachs at 13 and JPMorgan at 17. But it’s worth noting that China Renaissance’s profit grew much more rapidly than those global peers last year, reflecting its focus on China IPOs. That high-growth premium shows in the shares of CICC (HKEx: 3908), the company’s closest local peer, which now trades at a very rich PE ratio of more than 40.

Whether or not the strong pipeline of IPOs continues this year will be key to whether China Renaissance can maintain its strong growth. The Kuaishou IPO last month indicated there are still some big offerings in the pipeline. There’s always the chance that Ant Financial’s IPO that was scotched last year will resurface this year. And all eyes are also on another potential blockbuster deal that could come from ByteDance, owner of the popular TikTok and Douyin short video apps.

There are also some negative signs, particularly on the Chinese mainland, where the regulator is becoming more cautious about new listings on the country’s young Nasdaq-style STAR Market. The strong start to the year means China Renaissance should have little difficulty maintaining its strong performance in the first half of 2021. But things could get tougher in the second half, as it may struggle to beat its strong performance from the end of last year.

Two key takeaways:

1. China Renaissance’s big profit gains are the result of its strong position as an underwriter of IPOs and other fundraising for Chinese startups.

2. The company should be able to maintain its strong growth in the first half of the year, but could face more difficulty in the second half.

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