In 2023, the international business of some leading brokerages will bottom out and begin to walk out of a differentiated development path, recontributing more than 20% of revenue, and some even as high as 40%. According to the statistics of Securities Times and Brokerage China reporters, the revenue of Hong Kong's leading Chinese-funded investment banks such as CICC International, Huatai International, and CITIC International exceeded 10 billion yuan last year, with a year-on-year increase of 24%, 31%, and 13%, becoming the main source of income for the parent company.
From the perspective of business development strategy, these representative securities companies are Chinese investment banks with different focuses: CICC International has firmly grasped the market share of equity financing such as Hong Kong IPO and followed the investment banking route of elite soldiers, Huatai International has taken the technology-driven route and connected with the whole business chain at home and abroad, and CITIC International has focused on equity financing and wealth management business to continue to develop domestic and foreign customers.
In recent years, under the call of the China Securities Regulatory Commission to accelerate the construction of first-class investment banks, the leading securities firms with first-mover advantages are still increasing their efforts to expand overseas markets, taking the Hong Kong market as a bridgehead, and have now expanded to Southeast Asia, the United States, Europe, especially Singapore, which is gradually becoming the "new favorite" of the international layout of Chinese financial institutions.
The international business of the leading brokerage firm bottomed out, with a revenue contribution of up to 46%
Chinese securities firms "go overseas", regard the Hong Kong market as a bridgehead on the road to internationalization, since the 90s of the 20th century, the Asian financial crisis in 1997 and foreign investment banks on the same stage. In the past 30 years, 14 listed securities companies have achieved dual listing of A+H shares, and some leading securities companies have also issued GDRs and landed on the London Stock Exchange, extending their business tentacles to Southeast Asia, the United States and Europe.
In 2008, the U.S. subprime mortgage crisis led to the withdrawal of some foreign institutions, and the competitiveness of Chinese securities firms began to emerge, and then with the launch of the domestic and overseas interconnection mechanism, the return of Chinese concept stocks, and the vigorous development of Chinese real estate dollar bonds, the market share of Chinese securities firms in Hong Kong increased rapidly.
In recent years, Chinese brokerages have dominated equity financing markets such as Hong Kong IPOs. In 2023, the market share of Chinese investment banks in the number of IPO sponsors in Hong Kong will be 65.24%, an increase of 11.28 percentage points year-on-year. Among them, CICC International was the sponsor in underwriting 20 Hong Kong IPO projects, ranking first in the market, and CITIC International underwrote 12 IPO projects and 6 refinancing projects in the Hong Kong market, ranking second among Chinese securities firms.
However, during this period, Chinese-funded brokerages have also experienced twists and turns, Haitong International, which was originally in the first echelon, has fallen behind, and the performance of the head and tail of the industry is also very differentiated. After 2021, due to the impact of the real estate downturn, the performance of Chinese-funded securities firms in the following two years declined significantly, and some Chinese-funded investment banks allocated a large number of Chinese-funded real estate dollar bonds with their own funds, resulting in huge losses and almost swallowing up the fruits of painstaking operation in the past few years.
However, the performance of 2023 will bottom out and rebound, and Hong Kong's leading Chinese-funded brokerages represented by CICC, Huatai, and CITIC will return to the track of sustained growth. According to the statistics of the Securities Times and Brokerage China reporters, last year, the domestic market A-shares also faced short-term fluctuations, and the international business of the head brokerage "Two China and One China" became a major highlight, with operating income increasing by 10%-30% year-on-year, and contributing more than 20% to the operating income of the parent company.
Among these first-tier Chinese investment banks, CICC's international business, which has joint venture genes, has a relatively stable performance contribution, accounting for more than 25% of assets and revenue in the past few years, and its revenue contribution to CICC has increased even more significantly last year. CICC International's total assets are HK$180.231 billion, accounting for 26.16% of CICC's total assets, with operating income of HK$11.690 billion and net profit of HK$3.622 billion in 2023, contributing 46% to the revenue of the parent company and more than 50% to the net profit of the parent company, with a high per capita profit.
In 2023, Huatai Securities' international business revenue will be 7.926 billion yuan, an increase of 19.49% year-on-year. Among them, Huatai International's performance is remarkable, ranking second in the market in the number of IPO sponsorship projects in Hong Kong stocks, ranking first in the number of GDR issuance projects, and the total scale of AssetMark, a third-party financial platform in the United States, serving investment advisors, exceeded US$100 billion, ranking second in market share.
CITIC Securities, on the other hand, has relied on its comprehensive strength to expand international customers, leading the equity financing market share in the Hong Kong stock market, and at the same time accelerating the global layout of wealth management, not only setting up the CITIC Securities Entrepreneur Office (Hong Kong) service brand in Hong Kong, but also launching the Singapore wealth management platform, and doubling the sales revenue of overseas wealth management products year-on-year. In 2023, CITIC Securities International will achieve revenue of 11.3 billion yuan, a year-on-year increase of 13.29%, and net profit will double year-on-year. However, the personnel cost is high, the profit margin is relatively low, and it is still in the cost investment stage.
The performance differentiation of Chinese securities companies has intensified, and the development strategy has changed
Since the "going overseas", Chinese-funded securities firms have shown a trend of concentration to the head, especially in the field of equity financing, the concentration of investment banks is very high, and the competitive pattern is increasingly differentiated.
Securities Times Brokerage China reporter learned that at present, in addition to a few representative head brokers, other Hong Kong Chinese-funded brokerages are in a difficult situation, IPO and other equity financing is difficult to get a piece of the pie, even as a global coordinator to participate in underwriting is only barely a little market share, almost not profitable.
The traditional brokerage business faces competition from local brokerages in Hong Kong, and the market space is limited, making it difficult for retail customers to increase. In recent years, a number of local brokers in Hong Kong have closed down, including I-Access Investment, Zhonghui Capital Investment, Hesheng Securities, Zhongan Securities, etc. If you want to expand customers and expand your business in the mainland market across the border, it is basically difficult to implement the current tightening of regulations and policy restrictions. At the end of last year, regulators issued a document restricting domestic securities firms and overseas subsidiaries from adding mainland customers to offshore transactions.
In the early years, Chinese-funded securities firms also had a dividend period in Hong Kong, mainly in the form of regulatory support for "going out", and at that time, the financing cost of the Hong Kong market was low, and there was considerable room for interest rate differentials to carry out heavy capital businesses such as margin trading, stock pledge, and proprietary investment.
At present, the competitive environment of Chinese securities companies has deteriorated, or the competitive landscape has intensified, and the main reasons are:
First, the era of low interest rates linked to the US dollar has passed, and with the Federal Reserve raising interest rates, the financing cost advantage is no longer there, and the capital-heavy development model has encountered resistance. Margin trading, stock pledge and other financing businesses need capital support, and stock market fluctuations have a great impact on the valuation of collateral, which is easy to form bad debts.
Second, the downward cycle of real estate has dragged down Chinese financial institutions. In the past, the issuance and underwriting of Chinese real estate dollar bonds increased the market share of Chinese investment banks, and at the same time, many self-operated funds participated in the subscription, but in the past two years, real estate has exploded, resulting in large losses.
Third, the homogeneity of the development model of Chinese-funded securities companies is serious, with strong competitors in the past, international investment banks, and local securities companies in Hong Kong, with limited market space and a relatively single profit model.
However, the good news is that the head brokerage of the first echelon is still out of the trough, and the heavy capital business will still be one of the development priorities of the Chinese-funded brokerage, but the strategic change and the business layout have begun to reflect different characteristics:
For example, CICC International has firmly grasped the market share of equity financing such as Hong Kong IPOs, ranking first in the market all year round, with only 62 employees at the end of 2023.
In addition to equity financing such as IPO and GDR issuance, the asset management scale of AssetMark, a third-party financial platform previously acquired, is still growing in the US market.
For example, CITIC International has focused on equity financing, wealth management and other businesses, which stems from the fact that CLSA, the earliest acquisition, laid the foundation for brokerage business, and CITIC Securities has always adhered to the layout of internationalization and the whole business chain, and continued to develop domestic and foreign high-net-worth customers, while the performance of South Korea and Malaysia has risen against the trend.
From the perspective of business development model, the capital-heavy development model has encountered difficulties, and more Chinese-funded securities firms need to consider the development of customer-oriented business, that is, to return to the origin of intermediaries. In 2023, Guotai Junan's international business operating income will be 2.163 billion yuan, accounting for 5.99% of the operating income, an increase of 54.96% year-on-year, and the operating profit margin will increase by 29.97 percentage points year-on-year, mainly due to the growth of the investment income of financial instruments of the Hong Kong subsidiary, that is, the derivatives customer-demand business.
Accelerate the international layout, and the Singapore market has become the "new favorite"
"There is no turning back from the bow", Chinese investment banks started from Hong Kong to "go global", and the 30-year road to internationalization is full of twists and turns, but the head brokerage companies need to be bigger and stronger, and the international layout needs to be further expanded.
In November 2023, the Central Financial Work Conference proposed for the first time to "cultivate first-class investment banks and investment institutions". The China Securities Regulatory Commission (CSRC) said that it will support leading securities companies to become better and stronger through business innovation, group operation, mergers and acquisitions, etc., and form 2 to 3 internationally competitive investment banks and investment institutions by 2035.
Yang Minghui, general manager of CITIC Securities, said at the 2023 results conference that a first-class investment bank needs to have nine characteristics, including a strong customer network all over the world, able to seek underlying assets on a global scale and achieve the function of matching transactions, a high degree of internationalization, strong international competitiveness, and a high market share in the fields of global equity and debt financing, mergers and acquisitions, and a strong talent team with specialization, diversification and internationalization, which can bring together the best talents in the industry.
From the perspective of international network layout, in recent years, following Hong Kong, Singapore and other Southeast Asian markets have become the "new favorite" of the international layout of Chinese financial institutions. In 2023, CITIC Securities will set up a wealth management platform in Singapore, Huatai International will carry out securities trading and corporate finance business in Singapore, and Guotai Junan International will increase its capital in its Singapore subsidiary.
This is not unrelated to Singapore's Chinese community and economic vitality. According to data from the Monetary Authority of Singapore, from 2018 to the end of February 2022, the number of family offices in Singapore increased from 27 to more than 400, an increase of more than 13 times. Not long ago, Singapore announced visa-free travel to China, outbound tourism may usher in growth, and the pace of Chinese brokerages "going overseas" to deploy Singapore and other Southeast Asian markets may also accelerate.
Reporter's observation: the road to internationalization of investment banks is "long and difficult"
At the beginning of the year, Haitong International, which had been listed on the Hong Kong Stock Exchange for 14 years, completed its privatization and officially delisted. This Chinese-funded brokerage was once in a leading position in the Hong Kong market, and once contributed more than 30% of Haitong Securities' revenue by virtue of its international business, but now it has been delisted, with a cumulative loss of nearly 13 billion yuan for two consecutive years.
It is worth pondering whether Haitong International is the only case of Chinese securities firms stepping on the thunder of real estate dollar bonds, or is it the risk of the real estate downcycle faced by the industry in general, or is it a challenge to the capital-heavy business model?
It is undeniable that real estate has been one of the main driving forces of China's economic growth in the past, and the industry attributes of such industry attributes are destined to be tied to financial institutions due to its large financing demand, long capital turnover time and high rate of return. In Hong Kong, in addition to the Chinese investment banks of the brokerage system, there are also Chinese investment banks of the banking system, which are also difficult to resist the temptation of investing in real estate dollar bonds, and the difference may lie in the difference in investment scale, risk control, and countermeasures.
To be more precise, in the past, Hong Kong's financing interest rates were low, and the low financing costs combined with high-interest bonds, or the development of financing business, could earn considerable interest rate spreads, but this also led to the subsequent risks and bad debts of Chinese investment banks. Guosen Hong Kong, GF Hong Kong and Haitong International have successively planted their heels in margin, foreign exchange investment, real estate dollar bonds, etc., which are all capital-heavy businesses.
The reason for Haitong International's huge losses is mainly due to investment losses, including losses from Chinese real estate dollar bond investment, stocks, and equity investments, as well as bad debts from collateral impairment. Unfortunately, all of this happened in the face of the volatile and downward trend of the Hong Kong stock market, which has made the Hong Kong IPO fundraising and securities trading sluggish in the past two years, which can be described as a further aggravation. In 2023, Haitong International will have a net loss of 7.291 billion yuan, and now after privatization, Haitong Securities will slowly resolve debts and bad debts.
Over the years, Hong Kong's Chinese-funded investment banks have suffered a lot of losses, and the road to internationalization has not been smooth. Although the China Securities Regulatory Commission has repeatedly encouraged securities companies to "go overseas" and accelerate the creation of first-class investment banks, and the leading securities companies are also riveting to become international investment banks, relatively speaking, there are still many shortcomings in the internationalization of Chinese investment banks, including talents, risk control, derivatives, etc.
Even though CICC International is an elite investment bank, with only 30 people in 2022 and 62 in 2023, does CITIC International have enough talent reserves to further expand overseas markets? CITIC International has 1,882 people and 84 brokers, but its business structure is not the same as CICC's.
Second, the risk management and control capabilities are insufficient, and the detours taken by Chinese-funded securities firms in Hong Kong are equivalent to paying "tuition", and the exposed shortcomings in risk control are worth reflecting on.
Third, the lack of experience in financial derivatives, whether it is foreign exchange, interest rates, or stock derivatives, there are many varieties and complex structures in overseas markets, and some varieties may still be new things in the mainland.
In short, the internationalization of mainland investment banks is a "long road", and under the current trend of financial opening to the outside world, they can only face competition and prepare in advance.
Editor-in-charge: Wang Lulu
Proofreading: Gao Yuan