Fu Shek prospects hinge on stock sales

Fu Shek Financial, a Hong Kong-based financial service provider, has launched an initial public offering to raise up to HK$150 million.

The float's institutional tranche is covered.

Eight local brokers have loaned HK$1.6 billion in margin financing for Fu Shek Financial's IPO, equivalent to 105 times oversubscription of the retail portion, as of February 10. The firm plans to debut on Wednesday.

The group provides services to clients through Sinomax Securities, its operating subsidiary and is licensed with the Securities and Futures Commission to carry out type 1, type 4 and type 9 regulated activities in Hong Kong.

Sinomax Securities ranked 151th among 625 HKEX participants based on transaction value on trade executed through the stock exchange in 2018.

The group has assisted 26 companies to list, according to the prospectus.

The capital raised for eight of them was more than HK$1 billion, between HK$1.175 billion and HK$8.598 billion. Jiangxi Bank (1916), Bank Of Communication International (3329) and Shandong International Trust (1697) were among them.

The group acted as a co-lead manager, deputy bookrunner and underwriter for those companies.

Fu Shek's revenue climbed by 59.1 percent year-on-year to HK$56.7 million in 2018, and further increased by 15.1 percent year-on-year to HK$65.3 million in 2019.

Net profit grew by 142.3 percent year-on-year to HK$33 million in 2018, and climbed by 14.4 percent to HK$37.8 million last year.

The profit skyrocketed in 2018 mainly due to a substantial increase in commission and brokerage income from securities trading services and increase in commission income from placing and underwriting activities.

The rapid development of the placing and underwriting business and margin scale recently have become the major sources of profit, says Wu Man-sun, the group's chief finance officer and company secretary.

Forty-nine percent of the revenue came from these segments for the four months ended July 31, 2019.

The commission and brokerage income from securities trading services made up 46.7 percent in 2017, but dropped to 27.5 percent in 2018. It is no longer the biggest business of the company.

The group's major source of revenue was placing and underwriting activities in 2018, and clients from the securities business were only around 2,000.

If the the IPO market in the future remains subdued, the prospects of this stock is unclear, says Edmond Hui Yik-bun, chief executive and executive director at Bright Smart Securities.

Fifty-three new clients have opened a client account with the group, and commission generated from their securities trading business for eight months ended November 30, 2019 grew by about 7.9 percent as compared to the same period in 2018.

The company is also facing the risk of the drop in revenue from placing and underwriting segment generated on a project-basis if the commission rates are not secured.

Fu Shek intends to use 44 percent of the net proceeds to expand the placing and underwriting business and other related business, and spend 11.2 percent to expand the margin book.

The group aims to transform itself into an online financial services provider, and will develop new applications for securities trading, says Ng Sik-chiu, executive director at Fu Shek Financial.

About 9.9 percent of the net proceeds will be used to improve IT systems and 17.4 percent will be used to establish and renovate a new office.