Sunday, January 25, 2009

Investment bankers pay heavy price for China's broking pie

By: john
Overseas banks keen for a piece of China's red-hot brokerage sector will have to swallow some rich prices to buy into domestic securities firms, which are in no hurry to make deals as they focus on their own share listings. But for investment banks such as Citigroup and JPMorgan, a strategic partnership with a local securities house is a must in the long run, if they want to cash in on China's rapidly growing stock markets, whose capitalisation has reached nearly 20 trillion yuan ($2.65 trillion), exceeding Hong Kong.

Besides Citi and JPMorgan, banks including HSBC and Credit Suisse are shopping for Chinese partners. Even Morgan Stanley, which launched China's first such investment banking joint venture in 1995, is eyeing its second deal, banking sources said. You cannot ignore China if you want to explore new profit streams in emerging markets," said Philip Leung, a Shanghai-based partner for Ernst & Young.

Mainland China is on track to overtake Hong Kong, as Asia's biggest centre for initial public offerings this year. Analysts have said, they expected fund-raising by Chinese firms via domestic IPOs to hit 400 billion yuan this year, up from 165 billion yuan in 2006 as Beijing encourages more Hong Kong-listed firms to sell shares at home. Most overseas banks will miss out on the current IPO boom except for Goldman Sachs, UBS and Morgan Stanley, which established partnerships in China when the industry was still mired in a severe downturn.

Despite the recent lifting of a ban on foreign acquisitions of Chinese brokerages, major local players are in no mood to rush into partnerships, as they speed up preparations for initial public offerings to fund expansions and boost market share. Market leaders including Guotai Junan Securities, Everbright Securities and Orient Securities are gearing up to launch IPOs in the first half of next year.

An IPO is now the top priority for us," said He Xiaobin, board secretary of Guotai Junan Securities. Almost every securities firm wants an IPO to boost capital now as China's stock market is growing incredibly fast." Banking sources told that plans by Citigroup and JPMorgan to buy into Chinese brokerages had seen little progress over the past year, partly because some potential partners changed their minds as they opted for IPOs as an alternative way to raise funds. JPMorgan has been pursuing a stake in Bohai Securities, which began considering an IPO late last year, the sources said.

Citigroup's talks on a stake in Huatai Securities in Jiangsu province, they said, have stalled since the local government encouraged Huatai to pursue a listing. Before, you could not bargain with Citigroup too much on price because it is the top US bank," said a Chinese banker familiar with the situation.

But you don't need to bargain these days, as you have a better option: an IPO." ABN AMRO's effort to secure a stake in Haitong Securities also stalled early this year when the latter chose to do a local listing through a reverse takeover. Foreign firms can negotiate for a large enough stake to win management control of those brokerages after they are listed, possibly through a private share placement. But they may have to pay hefty prices at the time A rising tide lifts all boats," said the Chinese banker, adding that a brokerage IPO can give a fair market price for foreign investors' reference.

Shares of the only three Chinese listed brokerages, CITIC Securities, Hong Yuan and Haitong, have gone through the roof, as their profits soar on swelling trading turnover driven by a 19-month stock market bull-run.

As of last week, half of China's 100 or so brokerages had posted a combined net profit of 41.8 billion yuan for the first half, six times what the entire industry earned in the year-earlier period.CITIC Securities, China's top listed broker, has seen its share price more than triple over the past year to reach a total market value of $24 billion.

The stock is trading at more than 32 times its forecast earnings for 2007. By comparison, Goldman is trading at about 11 times its forward earnings.

Those foreign banks, able to negotiate for a sizeable stake in a Chinese securities house are unlikely to secure the favourable terms granted to UBS and Goldman, bankers said.

UBS paid $200 million for a 20% stake in Beijing Securities and won de facto management control of the company, just before China's stock market started to take off.Goldman Sachs, helped by renowned Chinese investment banker Fang Fenglei, won a coveted licence to set up a brokerage JV in China in 2004, after paying less than $100 million to bail out a bankrupt Chinese securities firm.The deals are starting to bear fruit.

Goldman Sachs, Gaohua and UBS Securities (Beijing) have won a series of IPO deals in mainland China.PetroChina, Asia's biggest oil producer, recently hired the UBS unit to help sponsor its Shanghai IPO, expected to raise $7 billion in the fourth quarter of this year.

China International Capital, China's first investment bank JV launched in 1995, in which Morgan Stanley holds a 34.3% stake, has been dominating the IPO league table in Hong Kong and China. ($1=7.55 Yuan)

Article Publish by: http://www.investmentbankingcentral.com



About The Author:
John Parker working on blog http://www.investmentbankingcentral.com . My job is to publishing articles, hot news and to provide latest information regarding Brokerage, Banking, Insurance, corporate venturing, Investment Banking and Venture Capital Blog

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