Brokers Navigate the Seas: Ebb and Flow, No More Haitong

In the first half of the year, the international business of Chinese-funded securities firms showed divergence.

Analysts believe that securities firms not affected by Chinese dollar bonds have maintained good profitability, showing a trend of continuous growth.

In the first half of 2024, the global market was full of twists and turns.

As the semi-annual reports were disclosed, the performance of Chinese-funded securities firms' international business unfolded under the complex global market.

By sorting out the international or overseas business data disclosed in the semi-annual reports of five securities firms listed in Hong Kong and six securities firms listed in A-shares, it can be seen that the performance of Chinese-funded securities firms' international business became more diversified in the first half of this year, with small and medium-sized securities firms bearing greater pressure.

The ranking of leading securities firms has already changed.

Among them, CITIC Securities International's revenue and net profit both ranked first; Huatai International's business revenue grew strongly, ranking second; CICC's overseas business revenue ranked third, but there is a large gap with the top two, and both revenue and net profit have declined.

Among the securities firms that suffered losses, half of the institutions narrowed their losses, while Haitong International, which was privatized and delisted from the Hong Kong stock market last year, and Xizheng International, which was suspended, saw their losses worsen.

Why is the international business of Chinese-funded securities firms so divergent?

This is related to the market conditions in the first half of 2024.

The sluggish transaction and listing of the Hong Kong stock market have brought a test to the international business of securities firms.

UBS Securities non-bank financial analyst Cao Haifeng believes that overseas business is seen as a new growth point for securities firms, especially for a few leading companies.

"Through the recently announced semi-annual report of securities firms, it can be observed that the international business of securities firms not affected by Chinese dollar bonds has maintained good profitability and shows a trend of continuous growth."

Some insiders also said that since 2021, the default of Chinese real estate dollar bonds has caused investment income losses, and the four-year slump of the Hong Kong stock market has led to a significant decline in the brokerage and investment banking business of securities firms, bringing great challenges to the internationalization process of small and medium-sized securities firms.

Tests are coming one after another, and the overseas expansion and transformation of securities firms are still continuing.

After experiencing the macro environment of the US dollar interest rate hike in 2023, securities firms generally made strategic adjustments to their overseas business structure, and capital-intensive businesses shifted, actively expanding overseas markets outside of Hong Kong, China.

The Central Financial Work Conference held in November 2023 first proposed "cultivating first-class investment banks and investment institutions," which not only put forward new requirements and goals for the development of the capital market but also required securities firms to consider how to better combine overseas expansion with "cultivating first-class investment banks."

The performance is divided, and there is no longer Haitong International in the business.

In the semi-annual report of 2024, the international business revenue of many securities firms performed brightly.

CITIC Securities, Huatai Securities, and CICC still ranked in the top three, but there were subtle changes in the second and third places.

Among them, Huatai Securities' revenue increased by 67.57%, while CICC's overseas business revenue decreased by 23.33%.

Analysts believe that the proportion of cross-border stock business in CICC's international business is relatively high, which may be more affected by the fluctuations in the equity market and regulatory tightening.

Guotai Junan International and Galaxy Securities ranked fourth and fifth with revenues of 2.171 billion Hong Kong dollars and 1.047 billion yuan (about 1.149 billion Hong Kong dollars), respectively.

While Zhaoshang International, Xingye International, and Bank of Communications International ranked sixth to eighth with revenues not exceeding 1 billion Hong Kong dollars.

From the perspective of profit contribution, the performance contribution of the Hong Kong subsidiaries of leading securities firms to the group has increased.

Huatai Securities research report mentioned that CITIC, Huatai, and Guotai Junan Hong Kong subsidiaries contributed 15.9%, 15.8%, and 11.9% to the group's net profit in the first half of 2024, respectively, increasing by 7.2, 6.7, and 7.6 percentage points year-on-year.

It is worth noting that the deployment of international business by leading securities firms is also undergoing structural changes.

On the evening of September 5, Huatai Securities announced that the sale of all equity interests in the packaged asset management platform Asset Mark had been completed, with a final transaction price of $1.793 billion.

The purchase price in 2016 was $768 million, and Huatai Securities is expected to realize an estimated income of about $796 million from this transaction, which will significantly increase the performance in 2024.

The revenue and net profit of the Asset Mark platform in 2023 were 3.791 billion yuan and 863 million yuan, respectively, equivalent to half of the international business revenue of Huatai Securities of 7.926 billion yuan in that year.

In the first half of 2024, Asset Mark achieved a net profit of 509 million yuan.

Data shows that from June 30, 2023, to April 30, 2024, the stock price of Asset Mark rose by 15.88% and reached the highest price in history on April 9, 2024.

Why sell such a profitable business?

Huatai Securities once stated that it helps to achieve a higher investment return, maximize the interests of the company and shareholders, and on the other hand, it is beneficial to further optimize the allocation of assets and resources, and expand the layout of future business.

The cash obtained from the sale will be used to supplement operating funds and other general corporate purposes.

Under the trend of division, some securities firms grow against the trend, while others' performance declines and never recover.

Due to reasons such as stepping on real estate bonds, Haitong International has been losing money for two and a half years.

According to the financial report, the operating income of Haitong International in the first half of 2024 was -1.697 billion Hong Kong dollars, and the net profit was -2.873 billion Hong Kong dollars, which is obviously dragging down the group's performance.

In fact, Haitong International began to suffer huge losses since 2022.

According to the financial report, the operating income of Haitong International in 2022 was -1.197 billion Hong Kong dollars, and the net profit was -6.541 billion Hong Kong dollars.

In 2023, the operating income was -1.575 billion Hong Kong dollars, and the net profit was -8.156 billion Hong Kong dollars.

Under the huge losses, Haitong Securities' subsidiary Haitong International Holdings announced the privatization of Haitong International in 2023.

This once-leading Hong Kong Chinese-funded securities firm and the "big brother" of Hong Kong stock IPOs have been quietly delisted in Hong Kong, and there is no longer Haitong International in the Hong Kong stock market.

On September 5, Guotai Junan announced that it is planning to merge Haitong Securities through a share exchange and issue A-shares to raise supporting funds.

The merger of the two means that there may be no Haitong Securities in the future.

In addition, as a cyclical industry, the international business of securities firms also has to face the market trough.

Taking Shenwan Hongyuan Hong Kong as an example, in the first half of 2024, its revenue was 146 million Hong Kong dollars, a year-on-year decrease of 59.5%; the loss was 37.316 million Hong Kong dollars, narrowing by 47.7% year-on-year.

Regarding the reasons for the loss, Shenwan Hongyuan Hong Kong analyzed that in the first half of the year, due to the tightening of cross-border business regulatory policies, the number of primary market issuances and the amount of fundraising continued to be sluggish, fixed-income investments and secondary market equity investments were weak, and brokerage, sponsorship, and underwriting businesses were all affected by market fluctuations.

"The profit growth of Chinese-funded securities firms' international business mainly comes from the increase in trading volume, proprietary trading, structured products, and the activity of IPOs.

In the first half of 2024, the global market IPO growth trend was good, and the Chinese market's IPO activities were restricted due to counter-cyclical regulation, but other markets performed strongly.

In addition, markets such as South Korea, Taiwan, China, Southeast Asia (Singapore, the Philippines), and India have shown significant growth in recent years."

Cao Haifeng mentioned.

Securities firms go overseas, from Hong Kong to Southeast Asia.

Hong Kong has always been the bridgehead for securities firms to go overseas due to its superior geographical location and its status as a global financial center.

Since the 1990s, the international layout of Chinese-funded securities firms has been carried out for more than 30 years.

At present, a total of 14 securities firms have achieved "A+H" dual listings.

As a mature capital market, the "law of the jungle" in Hong Kong is more obvious, and the industry's leading effect is obvious, and the competition is fierce.

"Hong Kong's marketization is high, and the license application adopts registration, and it is mixed operation, making the market completely open and the competition particularly fierce.

Chinese-funded securities firms need to face competition from international, peers, and local securities firms in Hong Kong."

Cao Haifeng said.

Although the competition is fierce, Cao Haifeng mentioned that after nearly 30 years of development, Chinese-funded securities firms have gained certain advantages in Hong Kong.

"Especially in business such as IPOs and refinancing, the proportion of Chinese-funded securities firms' business has greatly increased, but there is still room for improvement in trading and derivative business.

This is also related to the development strategy of Chinese-funded securities firms in overseas markets.

The trading business in overseas markets is competitive, and the commission rate is low.

It can be seen that the retail business of Chinese-funded securities firms in overseas markets is gradually decreasing, and more and more are turning to institutional business."

In the new share sponsorship business in the first half of 2024, the figure of foreign institutions has almost disappeared.

On the other hand, Chinese-funded securities firms have almost taken over all IPO business in Hong Kong, and Hong Kong's market has been facing a decrease in liquidity, the withdrawal of foreign securities firms, and a cliff-like decline in Hong Kong IPO fundraising in recent years.

According to Wind data, in the first half of the year, there were 30 new shares listed in the Hong Kong stock market, with a fundraising amount of 13.35 billion Hong Kong dollars and a net fundraising amount of 10.94 billion Hong Kong dollars.

From 2018 to 2021, the fundraising amount of Hong Kong stock IPOs was 288 billion, 316.8 billion, 400.1 billion, and 333.9 billion, respectively, and in 2022 and 2023, it fell to 104.57 billion and 46.295 billion Hong Kong dollars, with a rapid decline in fundraising amount.

In the first half of the year's Hong Kong stock IPO projects, CICC participated in 9 IPOs as the sole or joint sponsor, with the number of sponsors leading by a large margin; CITIC Securities (Hong Kong) participated in 5, Haitong International participated in 4, Zhaoyin International and Junfu participated in 2, and CCB International, Guotai Junan, HuaXing Securities, ICBC International, China Everbright, and others participated in 1.

Among foreign investment banks, only J.P. Morgan participated in the joint sponsorship of SuTeng JuChuang and LianLian Digital.

In addition, Hong Kong lacked large-scale IPOs this year, and the highest fundraising amount of the IPO in the first half of the year was Tea BaiDao, which was only 2.586 billion Hong Kong dollars.

The Hang Seng Index fell for four consecutive years from 2020 to 2023.

In the first half of 2024, the Hang Seng Index rose by 3.94%, and the Hang Seng Technology Index fell by 5.57%; according to Wind data, the transaction amount of the Hong Kong stock market in the first half of the year was 10.33 trillion Hong Kong dollars, a year-on-year decrease of 2.82%.Under such market conditions, some other industries have been affected.

In the first half of 2024, Hong Kong's high-end office rental market was weak.

Data from Jones Lang LaSalle showed that by the end of June, the vacancy rate of Grade A office buildings in Hong Kong hit a historical high of 13.6%, while the office rents in Central fell by 7.1%, leading all districts; the high-end yoga fitness chain Pure, known for its high prices, faced a rent crisis in Central due to reasons such as a decline in member renewals.

Central bankers, who once topped the income pyramid, have shifted their leisure activities from high-end wine tasting, fine dining, and Pure yoga to discounted coffee (like Kudi), boxed meals, and hiking, experiencing a downgrade in "clothing, food, housing, and transportation."

Along with China's manufacturing, consumer industries, and internet giants going global, and the continuous expansion of cooperation between China and overseas countries, many Chinese securities firms are also exploring other overseas markets.

In recent years, several leading securities firms have explicitly laid out plans for more global markets, with CICC building sales networks in New York, London, Tokyo, and other places; CITIC Securities has strengthened the development of overseas equity financing business in Southeast Asia; Galaxy Securities acquired the securities business of Malaysia's United Overseas Banking Group in 2018, completed a 100% stake in 2023, and renamed it Galaxy Overseas.

"China and ASEAN have very close and stable economic and trade cooperation, which is the reason for the rapid development of Galaxy Overseas and its advantage.

International investment banks usually focus on developed markets, but with the development of emerging markets, international investment banks will also gradually enter.

Galaxy Securities' layout in the Southeast Asian market has taken the initiative, and when the scale further expands, it will also choose the right time to enter mature markets," said Wang Sheng, Chairman of Galaxy Securities, when introducing the "going global" in Southeast Asia.

The results of going global in Southeast Asia have begun to emerge.

On July 19, 2024, Helen's completed its second listing in Singapore, with Galaxy Overseas, a subsidiary of Galaxy Securities, acting as the exclusive underwriter, listing on the Singapore Stock Exchange through introduction.

Financial reports disclosed that the cost of the second listing in Singapore was 121.52 million yuan.

However, industry insiders believe that the overseas expansion of securities firms in Southeast Asia and the Middle East is just the beginning and is not yet sufficient to compete with local institutions and international investment banks.

"Generally speaking, the development strategies of Chinese securities firms in overseas markets include mergers and acquisitions, gradual business expansion, and joint ventures," said Cao Haifeng.

"At present, due to the fierce competition in overseas markets, mergers and acquisitions are an effective means of expansion for new entrants, but in recent years, merger and acquisition activities have decreased due to changes in regulatory and market environments.

Cultural integration is one of the main challenges after mergers and acquisitions, requiring time and strategy to achieve the integration of different corporate cultures."