Strategic change needed for more secure future

China's struggling securities firms are looking for greater cooperation opportunities with overseas brokers.

China's lackluster stock market has cast a shadow over the earnings of underwriters and brokers, and urged them to redesign their business development strategies.

Almost half of the listed 19 securities companies had released their semiannual reports by the middle of August, with operating revenue and net income slumping at seven of them.

Affected by stock market turbulence resulting from the eurozone debt crisis and slowing domestic economic growth, 112 Chinese securities companies reported total business revenue of 70.63 billion yuan ($11.2 billion) in the first six months, a decline of 6 percent year-on-year, according to the Securities Association of China.

In the first half, those companies' net income totaled 22.66 billion yuan, down 13 percent year-on-year, according to the association. About 21 percent of them suffered losses.

The business conditions of many underwriters and brokers are now at a low ebb, due to the bleak situation in both the primary and secondary markets, said Yan Feng, vice-chairman and CEO of Guotai Junan International Holdings Ltd.

"In the IPO market, most big State-owned companies have completed their listing process, leaving many small-scale businesses that are lacking capital especially after the hit from the global financial crisis," Yan said.

"It is time for securities companies to shift their business model to focus on financial services, including asset management and consulting, in order to adapt to the changing economic environment."

However, Yan said that overall situation in 2012 is unlikely to be worse than last year, although profits may be slightly weaker in the first half.

The annual development report on China's securities industry, published by the Securities Association of China, indicated that the business income structure is changing.

"Income from brokerage services — the backbone of securities companies' profits — has been dropping," it said.

Brokerage service income accounted for 39 percent of total revenue in the securities sector in the first half of this year, compared with 51 percent in 2011, while that from underwriting and financial consultancy was 16 percent in the first half, and 18 percent in 2011, according to the association.

"This may require securities companies to redefine their target clients, paying much more attention to the private small and medium-sized businesses which need to enlarge their capital base to support both domestic and overseas development," Yan added.

Figures from the China Securities Regulatory Commission, the country's top regulator, showed that in the first seven months of the year, just 122 companies issued IPOs, compared with 187 in the same period a year earlier, influenced by the gloomy market outlook.

New share issues raised 86.1 billion yuan ($13.51 billion) from January to July, a 53 percent drop year-on-year, according to the CSRC.

Gloomy outlook

Yao Gang, vice-chairman of the commission, said more market-based share issue reforms are planned to help improve market sentiment.

He denied that the authorities intentionally delayed new listings to stabilize the prices of existing shares.

The top securities regulator issued a slew of policies in the first half of the year to support the market, including improving public company information disclosure systems, encouraging increased dividends for shareholders and stepping up efforts to curb insider trading.

However, the impact of the measures was limited. The Shanghai Composite Index, which tracks the biggest listed companies' shares, dipped to a 41-month low at the close on Monday.

Investors are expected to remain cautious as the outlook for the main board is set to remain gloomy over the next three quarters, with weak overseas demand likely to continue to decrease companies' orders and profits, said Jing Ulrich, managing director and chairwoman of global markets China at JPMorgan Chase & Co.

CITIC Securities Co Ltd, China's largest listed securities company by total market value, saw its operational income drop 22.91 percent year-on-year in the first six months. Its net income was 2.87 billion yuan, 28.25 percent lower year-on-year, according to its report.

But the worse-than-expected semiannual results didn't undermine the confidence of the top managers of the company. Instead, they have stepped up the pace of CITIC Securities' internationalization.

As many overseas brokers are fast shrinking their brokerage services due to the dim global market, Chinese companies should seize the opportunities to provide foreign clients with securities lending and cash services, said Yin Ke, vice-chairman of the CITIC Securities.

Yin said these services could include securities margin trading, foreign capital entrustment and settlement, and improved risk management and consultancy.

In July, CITIC Securities agreed to buy Credit Agricole SA's CLSA unit for $1.25 billion, and completed its purchase of a 19.9 percent stake in the brokerage for $310.3 million.

The company will buy the remaining 80.1 percent for $941.7 million, subject to conditions including regulatory approval, said a company statement.

"It is a shortcut for China's securities business to expand overseas by acquiring foreign institutions," said Yin, who added that the purchase will give CITIC Securities the overseas research component lacking in its current operations.

Larger risks

CITIC Securities is the first Chinese company to own a foreign brokerage. "Chinese brokers need to prepare for larger risks, but the difficulties after the marriage will be more challenging because of the huge cultural gap," Yin said.

Expanding business into overseas markets should be an important target for Chinese securities companies over the next 10 years, "and now we are at the first step", said Lu Xiaoning, CEO of the Guosen Securities (HK) Financial Holdings Co Ltd.

Since an increasing number of Chinese companies are planning to develop business globally, listing on overseas exchanges is an efficient way to raise capital, which requires domestic securities companies to improve supporting services, he added.

Many high-quality Chinese companies have yet to list on foreign capital markets. These will be the potential clients that need the overseas underwriting business, pushing securities companies to learn from the experience of international investment banks, said Yin from CITIC Securities.

On Oct 6, 2011, CITIC Securities, the mainland's biggest broker issued 995.3 million shares in Hong Kong, becoming the first mainland securities company to list both on the A and H-share markets.

More securities companies are expected to list in Hong Kong to raise capital in the coming months, drawing support from the international financial center and the renminbi offshore market, analysts said.

By the end of last year, the total asset value of Chinese securities companies reached 1.57 trillion yuan, decreasing 20.3 percent year-on-year. Their net asset value was 630 billion yuan, up 11.28 percent year-on-year, according to a report from the Securities Association of China.

The underwriting business may see a slight rebound in the rest of this year if economic growth is stable and companies' profits increase, according to analysts.

Terence Ho, a partner and the China IPO leader partner and Ernst & Young's IPO leader in China, predicted that the pace of listings in the second half may accelerate, raising about 150 billion yuan.

"Companies may raise 220 billion yuan in total this year from issuing IPOs."

However, the eurozone debt crisis and other uncertain international economic factors may continue to influence investor confidence, he added.

In July, the CSRC announced a cut in the transaction fees on share trading by 20 percent, a move expected to save investors 600 million yuan in the final four months of the year, which could also lighten brokers' burdens.

CSRC Chairman Guo Shuqing said in May that China's securities industry was entering the best period in its history, "and it has entered a new stage of innovation and development".

Guo pledged to support securities companies' overseas expansion, for example, by improving the financial consultancy business in cross-border mergers and acquisitions.

The top regulator also vowed to speed up the establishment of over-the-counter market, helping small-scale business to trade shares, which will be an important source of profits for securities companies in the future.