FINANCE: Everbright Jumps On Brokerage Tie-Up Bandwagon
Bottom line: Chinese brokerages will embark on a buying binge for targets in Hong Kong and debt-strapped European countries, with as many as 3 or 4 more deals likely this year after Everbright’s purchase of SHK Financial.
Everbright Securities (Shanghai: 601788) is joining the list of Chinese brokerages that have suddenly become quite acquisitive, with word that it will buy the brokerage arm of Hong Kong real estate giant Sun Hung Kai (HKEx: 16). Everbright’s move comes amid a flurry of other activity that has seen Chinese brokerages forge new tie-ups and raise big funds for M&A as they seek to expand abroad. Hong Kong looks set to emerge as one of the most popular targets for new tie-ups, thanks to its status as a crossroads between the Chinese and international investment communities.
Several other factors are driving this new wave of activity. One of the largest is the linking of Hong Kong’s and Shanghai’s stock exchanges late last year, which has given Chinese and international investors unprecedented access to each others’ markets. China’s booming stock market has also turbocharged the profits and stocks of Chinese brokerages, giving them plenty of cash and fund-raising opportunities to make new acquisitions.
This latest deal looks particularly significant as it shows the trend is moving down the food chain to smaller companies like Everbright, which is a decidedly mid-sized player in China’s crowded sector. According to the latest reports, Everbright Securities will pay HK$4.1 billion ($530 million) for a 70 percent controlling stake of Sun Hung Kai Financial Group Ltd. (English article)
Everbright is typical of the sudden boom that many Chinese brokerages have seen with the recent rallies in the nation’s 2 stock markets. The company’s net income rose 10-fold last year to just over 2 billion yuan, as the nation’s stock markets rallied more than 60 percent in the second half of the year. Its stock more than tripled in the last 2 months of 2014 alone, as China’s stock market rally went into overdrive after the central bank made a surprise lowering of interest rates to boost the nation’s sputtering economy.
The late-year rally roughly coincided with the launch of the Hong Kong Shanghai connect program, which linked up the 2 cities’ stock exchanges. China is expected to extend the program to include the Shenzhen stock exchange later this year, and regulators are currently making other policy changes designed to improve trading volumes over the fledgling system. All that should make Hong Kong brokerages attractive targets for their cash-rich Chinese cousins, meaning we could see more similar deals in the year ahead.
This latest tie-up marks the first major purchase of a Hong Kong brokerage by a Chinese one following the stock market rally and launch of the stock exchange connection late last year. Back in 2009 Haitong Securities (HKEx: 6837; Shanghai: 600837) purchased a majority stake in Hong Kong’s Taifook Securities for $235 million, and in 2012 industry leader Citic Securities (HKEx: 6030; Shanghai: 600030) bought Hong Kong-based CLSA for $1.2 billion.
Late last year, Haitong, which is China’s second largest brokerage, was also reportedly in talks to buy Portugal’s Banco Espirito Santo de Investimento SA. The brokerage’s parent, Banco Espirito Santo, was once Portugal’s largest lender by market value but is now selling off assets after being bailed out by the government at the height of that country’s debt crisis. That case shows that Chinese brokerages won’t only be limited to Hong Kong, and may also look for bargains being sold off by troubled European banks.
While a handful of brokerages have started buying, many of those same names and some others are taking advantage of strong investor sentiment to raise new funds for their purchases. Citic Securities and Haitong were joined by Guosen (Shenzhen: 002736), another mid-sized brokerage, in new fund-raising plans at the end of last year. Citic and Haitong announced plans to raise up to $5.3 billion and $4 billion, respectively, through issuing new shares, while Guosen raised $1.1 billion through an IPO.
With all that money in their pockets and the stock market rally and Hong Kong-Shanghai connect providing new business, the Chinese brokerages are almost certain to seek out a few more deals both in Hong Kong and further afield over the next 12 months. I would expect the deals will be split about 50-50 between Hong Kong and the west, with China’s biggest brokerages leading the charge. The number and size of deals will depend on how long China’s stock market rally lasts, but we could easily see 3 or 4 more major deals this year if conditions remain favorable.
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