FINANCE: Haitong Kicks Off Wave Of Cross-Border Brokerage Ties
Bottom line: Haitong’s purchase of a Portuguese investment bank marks the start of a new wave of cross-border tie-ups in the financial services sector, which could fuel a rally in stocks of Chinese brokerages.
A new wave of Sino-foreign tie-ups in the financial services arena could be taking shape, with word that China’s Haitong Securities (HKEx: 6837; Shanghai: 600837) is in talks to buy a Portuguese investment bank. I predicted just a couple of weeks ago that such a wave of tie-ups could be coming, following the launch of a historic Hong Kong-Shanghai financial link that will give average western and Chinese investors access to each other’s stock markets for the first time.
This potential new wave of tie-ups could get further momentum from a nascent stock market rally that has seen Shanghai shares surge over the last 2 weeks, including a whopping 4.3 percent gain in the latest trading session on Thursday. The last time we saw single-day changes of that magnitude was back at the height of the financial crisis in 2008, when such wild swings became almost the norm, most of them downward.
Following the massive gains over the last 2 weeks, the Shanghai and Shenzhen indexes are now up 37 and 40 percent this year, making them the best performers in Asia. That could help to boost interest in Chinese shares by foreign investors, fueling the need for more cross-border tie-ups between international brokers and their Chinese counterparts.
That kind of sentiment could be partly behind the recent surge in shares of Chinese brokerages, with Haitong as a good case in point. The company’s Shanghai-listed shares are up a whopping 55 percent over the last month, while its Hong Kong-listed shares are up by a similar 51 percent. Of course this latest news could also be fueling Haitong’s shares, on hopes the new tie-up will help the company funnel new overseas business from Europe to China.
According to the latest reports, Haitong, which is China’s second largest brokerage by market value, is in talks to buy Portugal’s Banco Espirito Santo de Investimento SA as part of its plans to go global. (English article) The investment bank is being sold by Banco Espirito Santo, which 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.
This particular deal looks quite similar to another one that saw leading Chinese private equity firm Fosun International (HKEx: 656) buy 80 percent of Portugal’s leading insurer, Caixa Geral de Depositos, from the nation’s government at the beginning of this year for 1 billion euros. (previous post) In another similar deal, leading Chinese brokerage Citic Securities (HKEx: 6030; Shanghai: 600030) purchased Hong Kong-based mid-sized brokerage CLSA in 2012 for $1.2 billion. (previous post) This year, Citic Securities further expanded its global footprint with its purchase of a minority stake in mid-sized US brokerage BTIG. (previous post)
Whereas Citic and Fosun have been 2 of China’s most outwardly acquisitive firms over the last couple of years, this new move by Haitong could represent a new stage in the outbound M&A story by second-tier players in China’s financial services sector. In addition to outbound M&A, I do expect we could also see some in-bound tie-ups coming in the space, as some of China’s mid-sized and smaller brokerages look for strategic foreign partners amid an ongoing consolidation of the domestic industry.
All of that said, the bigger question becomes: Which companies are best positioned to capitalize on this new wave of tie-ups, and which stocks are the ones to watch? The most likely drivers of the new tie-ups will probably be top-tier Chinese players, and we could also see some top and mid-sized international players make moves into China. As to stocks, the biggest gainers will almost certainly be mid-sized Chinese brokerages that find foreign partners, though some mid-sized foreign players could also get a boost if they find good partners to give them exposure to China market.
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