FINANCE: Citic, Galaxy Kick Off 2015 With Mega Fund Raising

By newsdoug on January 21, 2015

Bottom line: New mega fund-raising by Citic and Galaxy Securities could presage a flurry of global buying in the year ahead as non-banking financial firms look to expand abroad.

Massive new fund raising by 2 major Chinese financial firms is showing that these companies remain an attractive option for international investors, even as traditional banks have become a pariah due to their huge volumes of bad debt. The deals by financial conglomerate Citic Ltd (HKEx: 267) and Galaxy Securities (HKEx: 6881) will raise a collective $12.3 billion, and could also presage a new wave of global buying by fast-growing Chinese financial firms outside the nation’s traditional banks.

While the fund-raising figures are certainly a headline-grabber, neither of these 2 deals looks particularly exciting to me for different reasons. In the Citic case, both of the investors are making their purchases at least partly for political reasons, since Citic is one of China’s oldest and best connected financial conglomerates. In the Galaxy case, the fund-raising is just a plan right now, and it’s not clear at all if investors will flock to the private placement of new shares that the company intends to make.

Let’s start with the Citic deal, which is easily the largest of the pair and will see the company raise $10 billion through the sale of shares to Japan’s Itochu Corp (Tokyo: 8001) and Thailand’s Charoen Pokphand Group (CP). (English article) The pair will take a joint stake of 20 percent in Citic, which is trying to follow a Beijing directive to bring more private capital into the stodgy state-run sector. The Itochu investment is the largest ever in China by a Japanese company.

Both Itochu and CP have long histories in China, dating back as early as the 1970s, and are considered friendly companies by Beijing. Thus their decision now looks at least partly motivated by politics, to maintain their good ties with Beijing. That doesn’t mean that Citic isn’t a good investment, as it’s already one of China’s more innovative and entrepreneurial financial firms despite its state-run status.

This investment comes after Citic underwent a major restructuring last year, which ended with the parent injecting most of its assets into a Hong Kong-listed company that was formerly one of several small listed units. As a result of that injection, the listed Citic is now a much larger company than the previously listed unit, and is trying to diversify its shareholder base. On the whole I would call this new investment neutral to slightly positive, since the new shareholders must feel a certain level of confidence about Citic’s prospects to make such a massive new investment.

Next let’s look at Galaxy, which has just announced its own fund raising plan but has yet to announce buyers for the $2.3 billion in new shares it will issue. (English article) Galaxy said it could issue the 2 billion new shares at a large discount of up to 20 percent from their last trading price before the plan was announced. Some 60 percent of the new funds will go to Galaxy’s margin finance, securities lending and stock repurchasing business, indicating it may be making preparations in case China’s turbo-charged stock markets soon head into a correction.

I suspect that some or all of the remaining funds, in this case about $1 billion, could be used to help finance overseas acquisitions. Rival Haitong Securities (HKEx: 6837; Shanghai: 600837) raised a nifty $3.9 billion in its own in a private placement and bought a Portuguese investment bank last month (previous post), and the cash-rich Citic has made several of its own major purchases over the last 3 years in the US and Hong Kong. With all that cash in their coffers and a number of bargains in the global market, look for these Chinese financial firms to step up their international buying in the year ahead, with 2 or 3 deals possible in the $1-$3 billion range.