FINANCE: CICC Eyes Return to Glory with Brokerage Merger

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Bottom line: A potential merger between CICC and China Investment Securities could mark the start of a resurgence for CICC, as it seeks to regain its former glory as China’s premier investment bank.

CICC in rumored merger talks

Former leading investment bank CICC (HKEx: 3908) is making a rare appearance in the headlines, with word that it’s discussing a possible merger with second-tier brokerage China Investment Securities. I haven’t written about CICC for nearly a year since it made a relatively respectable IPO in Hong Kong after several delays and a downsizing. I and others have mostly forgotten about CICC these days, following a period of turmoil that saw most of its top executives leave after it rapidly lost its position as China’s preeminent investment bank.

Frankly speaking, none of China’s investment banks are particularly interesting in my view, mostly because they are all chiefly stock brokers that derive most of their money from trading activity. That makes them highly vulnerable to market cycles, and none of the big names have managed to avoid that reality. What’s more, many of the brokerages are often accused of market manipulation and are frequently chastised and even punished by the regulator.

CICC was a different breed from that group in its early days, due to its roots as a pure investment bank and its strong parentage that included Morgan Stanley (NYSE: MS) and close ties to Beijing through its founding foreign and Chinese partners, respectively. But Morgan Stanley later sold out of the venture, which also lost its golden touch in Beijing due to changes in central government leadership.

Following the departure of its top executives more than a year ago, the company appears to be trying to reinvent itself by exploring this new potential merger with China Investment Securities. (English article; Chinese article) Reports seem to indicate that talks are still at a relatively early stage, and that no particular structure has been discussed for a combined company.

Complementary Pair

In terms of profiles, the 2 companies do appear relatively complementary, each with around 93 billion yuan ($14 billion) in assets. CICC’s traditional strength has been in investment banking, and it helped to take many of China’s biggest companies public in its heyday. By comparison, China Investment Securities is a more traditional brokerage that was ranked as the nation’s 17th largest player last year.

CICC’s profit grew 75 percent last year, while China Investment Securities tripled due to a huge increase in trading volumes during a stock market surge and subsequent collapse. A possible driver of this new marriage appears to be Central Huijin, a unit of China’s sovereign wealth fund that owns big stakes in the country’s 4 top banks. Huijin owns all of China Investment Securities and 28 percent of CICC, and has been broadly backing an overhaul of China’s unruly securities industry.

CICC shares jumped 1.5 percent in the latest session after the reports came out, and are now about 16 percent head of their IPO price from last November. While that sounds like a solid performance though not spectacular, it’s actually quite good since the broader Hang Seng Index is down about 8 percent over the same period.

This particular news looks somewhat promising as it could create a company that has the potential to be a more active player in the lucrative but highly competitive international investment banking scene. Few Chinese brokers have managed to make that transition, and with the exception of one or two most make nearly all their money in China. One exception is leading player Citic Securities (HKEx: 6030; Shanghai: 600030), which has made major acquisitions in the US and Hong Kong.

It’s probably a bit too early to say whether a combined company could regain some of CICC’s former glory, though such a deal would probably lift the new player into the top 10 among Chinese brokerages and investment banks. I would be cautiously optimistic that a deal could signal the start of a new era for CICC, and would expect we could see more upside in the stock if future reports indicate a deal is moving ahead.

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