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The company’s planned Hong Kong IPO would complement its current Shanghai listing, and is part of efforts to advance its globalization strategy
Key Takeaways:
- Nanhua Futures has filed to list in Hong Kong, reporting its net profit rose 13.7% last year to 458 million yuan
- The company hopes to expand the reach of its fast-growing overseas business, which could soon account for more than half of its revenue
Volatile global financial markets, roiled by geopolitical tensions and shifting economic policies, are leaving many investors increasingly risk-averse these days. But that hasn’t fazed Nanhua Futures Co. Ltd. (603093.SH), which is moving ahead with plans to list in Hong Kong, complementing its existing Shanghai listing, as part of a bid to expand its global reach.
Founded in 1996, Nanhua is one of China’s earliest futures companies, based in the scenic Eastern city of Hangzhou, according to its listing document filed earlier this month. The company takes pains to emphasize it has no ties with Hong Kong-listed South China Financial Holdings Ltd. (0619.HK) or its affiliates, whose Chinese names sound similar to Nanhua’s.
The company offers four main types of service, namely, domestic futures brokerage, domestic risk management, domestic wealth management and offshore financial services. As their name suggests, the first three are for customers based in China, while the last caters to overseas clients. Its domestic and international businesses are split roughly evenly, accounting for around 51% and 48% of the company’s revenue last year.
Rising offshore transactions
Like many Chinese providers of trading services for financial products, Nanhua derives most of its revenue from commissions and transaction fees, as well as interest on its investments. Its domestic futures brokerage commissions and transaction fees generated net revenue of 404 million yuan ($55.4 million) in 2023 and 300 million yuan in 2024, down 25.8%. Revenue from its overseas business moved in the other direction, growing by 45.7% to 146 million yuan over that period. Nanhua suffered at home from falling average commissions for its domestic futures business, while it benefited overseas from rising volume for its offshore futures transactions.
The company’s offshore arm provides services related to futures, as well as asset management, securities brokerage and leveraged foreign exchange transactions, operating out of branches in Hong Kong, Chicago, Singapore and London.
Its net profit has risen steadily over the past three years, jumping 63.8% from 246 million yuan in 2022 to 403 million yuan in 2023. It increased another 13.7% to 458 million yuan last year, which the company attributes largely to growing profitability of its offshore business.
As it faces intense competition at home, one of Nanhua’s goals is to continue building up its overseas operations. It believes it can use a Hong Kong listing to strengthen the capital base for its overseas branches and facilitate expansion of its overseas operations, giving it more resources to compete and mitigate risk in the global market.
However, rising geopolitical tensions could throw a wrench into some of those global aspirations. New risks in such an environment could include tougher regulatory restrictions or outright barriers against foreign companies in some countries.
Tech innovation
As its name implies, futures brokerage is the biggest of Nanhua’s three main domestic business segments. The company hopes to stay ahead of the crowded field through tech innovation, aiming to further advance its fintech and digital technologies, strengthen its risk management system for futures and spot transactions, and to optimize the speed and reliability of its trading systems, to give it competitive advantages. China’s domestic industry is plagued by homogeneity, making differentiation through technology a plausible differentiator. But saying something and putting such plans into action are different matters.
If its Hong Kong IPO succeeds, Nanhua would join industry peers Holly Futures (3678.HK; 001236.SZ) and Zhongtai Futures (1461.HK) in listing on the city’s stock exchange. Holly is the first company with dual listings Hong Kong and on China’s domestic A-share market, giving it a first-mover advantage in that regard. Its Hong Kong shares currently trade at a price-to-earnings (P/E) ratio of around 73 times. The similarly globally minded Zhongtai trades at an even higher 100 times. But such high figures could be inflated by lack of trading in the stocks, reflecting a major challenge that Nanhua may face – namely, lack of investor interest – if it completes its Hong Kong IPO.
For comparison purposes, more reasonably valued A-share peers might be better benchmarks. Leading futures companies Yongan (600927.SH) and Ruida (002961.SZ) trade at P/E ratios of 25 times and 17 times, respectively, compared to a similar 17 for Nanhua’s Shanghai-listed shares. So, the company should theoretically fetch a similar-level valuation in Hong Kong, where stocks from the same company are often valued lower than their counterparts in Shanghai and Shenzhen.
In short, Nanhua looks like an interesting bet for its status as one of China’s earliest futures companies to go global, with some apparent success. But many potential obstacles could lie ahead, as the company drives into turbulent global financial markets, and tariffs and geopolitics pose one of the biggest risks for multinationals. Limited understanding by Hong Kong investors about the ways of Mainland Chinese futures companies might also weigh on its valuation, potentially leading to low trading volumes and limited interest in Nanhua’s stock if and when it completes its new listing plan.
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