Driven by strong growth
potential, Chinese brokerages are striving to expand their market
presence to fund expansion of more networks and types of businesses
as well as to satisfy their hunger for capital.
Securities firms are
using various methods to boost capital in 2008's more competitive
market. Brokers have thus worked out plans to go public either by
initial public offering (IPO) or through backdoor listing - in
which a firm merges with an already listed company.
Pacific Securities, a
small brokerage in West China's Kunming city, made its debut on the
Shanghai stock exchange on Nov 28, becoming one of the best
first-day performers among Chinese IPOs on domestic stock
exchanges.
Analysts said eight
brokerages - Galaxy Securities, Guotai Jun'an Securities, Huatai
Securities, China Merchants Securities, Orient Securities,
Everbright Securities, Shenyin Wanguo Securities and Guosen
Securities - may launch IPOs this year.
Four brokerages -
Guangfa Securities, Southwest Securities, Sinolink Securities and
Capital Securities - are planning to go public through backdoor
listing in 2008, analysts said.
The strong revenue
growth of securities firms and the industry's huge growth potential
made listed securities firms extremely popular with investors in
the domestic A-share market last year.
Shares of CITIC
Securities, the country's largest stockbroker by net assets, rose
from 27.38 yuan on the last trading day of 2006 to 89.27 yuan on
Dec 28, the last trading day of 2007, increasing as much as 226
percent last year. It said it expected a net profit growth of over
400 percent for 2007.
Shanghai-based Haitong
Securities, the country's third largest domestic brokerage by
assets, posted a net profit increase of over 700 percent to more
than 5.3 billion yuan in 2007.
Traditional brokerage
services, new accounting rules and rising income from underwriting
as the number of IPOs increases, are the three major contributors
to securities companies' earnings, said Xie Yan, an analyst with
Haitong Securities.
The strong performance
has helped more brokerages to meet the China Securities Regulatory
Commission's requirement for three consecutive years of profit
gains necessary for an IPO application.
According to a report
from the Economic Observer newspaper in January, Shenzhen-based
China Merchants Securities and Nanjing-based Huatai Securities are
the most advanced brokerages in the listing process in 2008. They
are expected to become the first batch to launch IPOs in the first
half of the year, say media reports.
Galaxy Securities,
Guotai Jun'an Securities and Everbright Securities are also to
launch IPOs this year.
Merchants Securities
said that it is being coached on IPO by future bookrunners,
including Goldman Sachs Gaohua Securities and UBS Securities, while
Huatai Securities finished its financial restructuring in
2007.
"Large brokers have
higher potential to launch IPOs. Funds raised through IPO are also
larger than through a backdoor listing," said Zhao Mingxun, an
analyst with CJIS Securities. "To expand their business, most big
brokerages are striving to launch IPOs.
"But due to a four-year
market slump, some medium-sized brokerages couldn't record three
years of consecutive profit gains as required in an IPO
application, and had to choose backdoor listing," Zhao
said.
According to Zhao, the
biggest challenge facing Chinese medium-sized brokers is profit
capabilities. Because the industry is still in its formative stage,
competition remains fierce.
"But the situation is
getting better and most brokerages made profits last year thanks to
the bullish stock market," Zhao said.
Total turnover on the
Shanghai and Shenzhen stock exchanges amounted to 46.06 trillion
yuan in 2007, up 409 percent from 2006.
Eight small and
medium-sized securities companies posted 543 percent growth in
combined yearly net profit to 5.21 billion yuan in 2007.
Beijing-based Guodu
Securities posted a net profit of 1.2 billion yuan, while Guangxi
Sealand Securities' rose 416 percent to 614 million yuan. Shanxi
Securities posted an annual net profit of 820 million yuan and
Beijing Gaohua Securities 247 million yuan.
The average investment
income of the eight securities firms amounted to 470 million
yuan.
Sinolink Securities Co,
a small brokerage, has received regulatory approval to list on the
Shanghai Stock Exchange by merging with Chengdu Urban Construction
Investment and Development Co, Sinolink said.
Haitong Securities was
the first firm to go public using the backdoor method, which the
company completed on July 5 by merging with Shanghai Urban
Agro-Business Co. Haitong's shares have since surged more than 30
percent.
"Backdoor listing takes
less time and has less financial cost, however, it has become
harder to get regulatory approval as under-the-table transactions
and manipulation of share prices are concerns in the backdoor
listing process," Zhao said.
(China Daily
February 20, 2008)
