Looking Abroad

Fiercer domestic competition and growing efforts to internationalize the RMB have many Chinese securities firms considering IPOs on the Hong Kong stock exchange in an effort to raise their international profile. Two leading Chinese securities firms， Shanghai-listed CITIC Securities (中信證券) and Haitong Securities (海通證券)， China’s No. 1 and No. 3 brokerages by market value， recently announced plans for a Hong Kong listing.

The equity offerings are likely to both enhance the capital strength of the stock houses and boost their images as they step up hiring professionals to expand in Hong Kong， the key offshore RMB market， analysts said.

“The two brokers’ Hong Kong listings go beyond fund raising，” said Steven Liu， an analyst with Bank of China (中國銀行). “They showed that Chinese securities giants are eager to get closer to the international investment community.”

Analysts expect the issuance， set to be completed as early as the second quarter， will also further spur consolidation in China’s segmented securities industry where the pace of mergers and acquisitions is set to accelerate in the next few years.

Chinese brokerages have so far lagged behind banks and insurers in tapping the Hong Kong stock market. To date eight Chinese banks and three insurers have listings on both mainland and Hong Kong exchanges but no Chinese securities firm has a dual listing. There are currently 15 mainland stock firms listed on either the Shanghai or Shenzhen exchanges， while the Hong Kong units of Guotai Junan Securities (國泰君安證券) and Shenyin Wanguo Securities (申銀萬國證券) are listed on the Kong Kong exchange.

CITIC SECURITIES

Beijing-based CITIC Securities said in late March that it will sell as many as 110 million new shares in Hong Kong， which will account for up to 10% of its total share capital after the float. The brokerage’s parent is CITIC Group (中信集團)， China’s first state-owned investment group created in 1979. CITIC Securities was the first publicly-traded broker on the Shanghai exchange when it listed there in 2003.

CITIC Securities said it plans to use the proceeds from the Hong Kong IPO to build its overseas business platform and shore up working capital. Yin Ke， CEO of CITIC Securities International (中信證券國際有限公司)， the overseas unit of CITIC Securities， has told media that it is seeking acquisitions in order to improve its operation abroad.

Industry analysts expect the price of CITIC Securities’ Hong Kong offering will be equivalent to between RMB 10 to 15 per share and could raise up to RMB 16.5 billion (USD 2.5 billion).

“The Hong Kong stock sale may dilute earnings in the short term， but if CITIC uses the capital wisely， that will boost capital-use efficiency and benefit its long-term growth，” said Guo Yi， an analyst with AVIC Securities (中航證券).

The stock issue in Hong Kong may lower the per-share earnings of CITIC Securities by about 10%， according to Guo.

Last year， CITIC Securities announced a plan to form a broker and investment bank partnership with French bank Credit Agricole. Under the proposal， the two sides will consolidate their brokerage and investment banking businesses at CITIC Securities International and CLSA， in which Credit Agricole holds a majority stake.

HAITONG SECURITIES

Shanghai-based Haitong Securities in late April announced plans for a Hong Kong IPO， which will account for up to 13% of its overall capital after the sale， excluding over-allotment. The amount is equivalent to nearly 1.42 billion shares.

Jin Xiaobin， board secretary of Haitong Securities， said that the nearly USD 2 billion issuance will help the company accelerate development of both its domestic and overseas businesses in what has become an increasingly competitive environment.

In 2009， Haitong Securities became the first Chinese mainland brokerage to take over an overseas broker when it purchased Hong Kong-based Taifook Securities (大福證券). It later changed the subsidiary’s name to Haitong International Securities (海通國際證券).

Industry sources also say that Haitong Securities and Macquarie， Australia’s biggest listed investment bank， have held talks about a possible joint venture. Haitong Securities is majority owned by several Shanghai-based state-owned companies.

NEW CHALLENGES

Chinese mainland securities companies are struggling to develop new businesses in the face of increasing competition and shrinking turnover on the domestic capital market. CITIC Securities posted a 9.5% drop in first-quarter earnings due to a 33% decline in commission fees. Net income during the first quarter this year dropped to RMB 1.36 billion， compared with 1.5 billion a year earlier. Similarly， the brokerage fees of Haitong Securities dropped 4% in the first quarter although net profit rose 17% to RMB 1.19 billion.

Some analysts believe that the Hong Kong listings are partly aimed at boosting the mainland companies’ brand recognition among investors and issuers in Hong Kong and beyond.

“Apart from raising capital， the mainland stock firms are preparing to compete with global investment banks in the overseas market，” said Song Jian， an analyst with Minzu Securities (民族證券). “They want the stock sales in Hong Kong to help them go global and win more mandates in the future， especially when the mainland is set to open an international board.”

The new international board is expected to open in Shanghai as early as this year and listing candidates include multinational giants such as HSBC， Coca-Cola and Unilever as well as Hong Kong-listed red chips such as China Mobile (中國移動) and CNOOC (中海油).

As the mainland authorities accelerate the internationalization of the RMB， Chinese securities houses have also increased their activities in Hong Kong. CITIC Securities International advised on the initial public offering of Li Ka-shing’s Hui Xian Real Estate Investment Trust (匯賢房地產投資信托基金) in April， Hong Kong’s first stock sale denominated in RMB.

According to Bloomberg data， four Chinese financial firms — BOC International (中銀國際)， CITIC Securities， China International Capital (中國國際金融有限公司) and Bocom International Holdings (交銀國際控股有限公司) — are among the top 10 underwriters of stock sales in Hong Kong so far this year. Last year， BOC International and CICC were the only Chinese investment banks among the 10 largest underwriters.

THE SKEPTICS WEIGH IN

Some market watchers question why Chinese securities giants are raising new funds when they already have large stocks of capital reserves and cautioned that the IPOs could dampen return-on-equity in an uncertain business environment. Haitong Securities had capital reserves valued at RMB 23.3 billion at the end of the first quarter， while the figure for CITIC Securities was RMB 26.6 billion， according to their earnings statements.

“The so-called internationalization process of domestic securities houses has huge uncertainties，” says Yang Jianhai， an analyst with Essence Securities (安信證券). “Take CITIC for example， it is unclear whether it can gain control of an overseas joint-venture and how quickly it can grow its business.”

Some market watchers suggest mainland brokers set up strict risk-management systems when making investment decisions overseas as China previously incurred big losses from its investments in Morgan Stanley and Blackstone.

As for the domestic competition， analysts expect that the larger securities companies will expand their advantages over smaller domestic rivals as they lead in investment banking and other businesses.

“Top companies will likely have quite a few opportunities to acquire competitors，” says the Bank of China’s Liu. “That will do more good than bad for the mainland securities industry.”