Why did Huatai Securities' proposed issuance of Hong Kong dollar convertible bonds drop sharply?

On February 3, 2026, Huatai Securities issued an announcement planning to issue HKD 10 billion of H-shares convertible bonds. Once this news was released, Huatai Securities’ stock price plummeted by 8.24% on the same day. Here is an analysis of the possible reasons:

1. Basic Information about the HKD 10 billion H-share Convertible Bonds Issuance

Huatai Securities announced its intention to issue zero-coupon convertible bonds due in 2027 under general authorization, with a total amount of 10 billion HKD. The proceeds will mainly support the company’s overseas business development and supplement other operating funds. The initial conversion price is HKD 19.7 per H-share, with an issuance price premium of 6.78% over the previous trading day’s price before the announcement. It is expected to convert into approximately 508 million H-shares, accounting for about 29.53% of the existing issued H-shares and about 5.62% of the total existing shares. This will have a significant dilutive effect on H-shares but a smaller impact on A-shares.
Maturity date: February 8, 2027; Form and face value: The bonds are issued in registered form, with a designated denomination of HKD 2,000,000 per bond, and any excess must be in whole multiples of HKD 1,000,000.
Conversion period: From the day after settlement until 10 business days before maturity (including the first and last days), or if the company requests redemption before maturity, the period ends at the close of business on the company’s designated redemption date, which is no later than 10 business days before the redemption date (including that day). As of Q3 2025, the company’s leverage ratio was 3.86x, an 18% increase from the end of 2024. Static estimates suggest that before conversion, the leverage ratio would increase to 3.91x, and after conversion, it would decrease to 3.73x, having a minor overall impact on the company’s leverage. The dilution effect on H-shares is significant, but the impact on A-shares is small.

2. Why Huatai Securities’ stock dropped sharply

3. The issuance premium is relatively small, indicating that the company and subscribers expect the price to converge around HKD 19.7, with only a 6.78% premium over the announcement date, and the conversion price is only 5.09% above the five-day average price, leaving limited upside potential;

4. The typical average issuance premium should be around 18%. Since it is below 18%, the stock is expected to decline by about 11% to reach an average premium of around 18%;

5. The bonds are expected to convert into approximately 508 million H-shares, which is about 29.53% of the existing issued H-shares and about 5.62% of the total existing shares, leading to a significant dilution effect on H-shares;

6. The main reason is Huatai Securities’ low long-term ROE, with poor capital efficiency, making it difficult to generate positive market resonance. In 2024, ROE was only 7.89%, and mid-2025 it was just 3.66%. Will expanding overseas improve overall ROE? In the current international environment, this seems like a less favorable story.

7. Huatai Securities’ large-scale bond issuance

On February 6, 2026, Huatai Securities (06886) announced that, according to the “Huatai Securities Co., Ltd. 2026 Public Offering of Corporate Bonds (First Phase) Announcement,” the company will issue bonds in two varieties. The first variety has a 3-year term with a coupon rate inquiry range of 1.3%-2.3%; the second variety has a 5-year term with a coupon rate inquiry range of 1.5%-2.5%. The coupon rate for these bonds will be negotiated between the issuer and lead underwriters based on the results of the offline rate inquiry.
On February 5, 2026, the issuer and lead underwriters conducted offline rate inquiries with professional institutional investors. Based on the results and mutual agreement, the final coupon rate for the first variety was set at 1.85%, while the second variety was not actually issued.

This indicates that Huatai Securities relies heavily on bond issuance. In mid-2025, the company’s debt-to-asset ratio was 77.77%, and it continued to rise after the bond issuance.

4. The securities industry has undergone profound changes

The bull market starting in 2024 was indeed driven by securities, but the performance in 2025 was not as strong as before. I believe the market’s definition and understanding of the securities industry have changed significantly, so it is unlikely to operate securities stocks based on traditional experience.

5. Forecast for Huatai Securities’ future trend

Based on a conversion price of HKD 19.7 per H-share, an expected minimum 18% premium is needed. Therefore, Huatai Securities (06886) listed in Hong Kong should fall to at least HKD 16.15 (below), so it will continue to decline. After the 2025 annual report is released, the stock price will be adjusted according to actual performance.