HONG KONG (Dow Jones Investment Banker) – The long-awaited equity offering by China’s CITIC Securities Company Limited is finally under way. The brokerage is looking to raise up to US$2 billion from investors, and secure a secondary listing in Hong Kong. Bookbuilding is set to start on September 16, for an October 6 closing. Although CITIC Securities has been listed on the Mainland since 2003, its preliminary filing with HKEx provides a fascinating glimpse into China’s domestic investment banking industry and the activities of one of the leading houses there.

24.15% owned by CITIC Group, CITIC Securities was created in 1995 with its headquarters in Shenzhen, later floating ‘A’ shares in Shanghai. It now has a market capitalization of more than US$18 billion, although the share price performance has been pretty much flat over the last 12 months.

[Click HERE for a link to the HKEx web proof information pack: http://www.hkexnews.hk/reports/prelist/CITICS-20110905-Warn.htm]

A full-service investment bank, CITIC Securities is present across the whole spectrum of activities, both fee-based (advisory, debt and equity financing, sales, trading, brokerage and asset management) and flow-based (market-making and prime services). It also makes substantial investments. The firm has leading positions in pretty much all of its businesses, but, as most of its competitors in China, derives well over half of its revenues from brokerage and trading.

China’s capital markets have developed at a relentless pace: ECM volumes have grown at a compound annual rate of 37.4% between 2006 and 2010, while DCM transactions have expanded even faster – 42.6% – over the same period. That’s about twice the growth seen in Hong Kong. China’s securities markets now rank third in the world by value, and second by trading turnover.

In 2010, CITIC Securities lead managed 41 equity offerings and 71 debt issues on the Mainland, a market still closed to all but a handful of international houses. It generated revenue of US$4.7 billion, with a profit of almost US$1.8 billion – more than five times that of Japan’s Nomura Holdings Inc. in the year to 31 March, 2011. Financials have since declined, although much of that was due to the sale of a 53% stake in China Securities, completed in late 2010. The cost-to-income ratio is in line with international peers, with healthy capital ratios to boot.

Strategy includes maintaining its dominant position in fee-based activities, growing its flow-business and, importantly, diversifying internationally, while also attracting further talent to its platform.

65% of the IPO proceeds have been earmarked for international expansion, following the acquisition in July 2011 of a 19.9% stake in each of CLSA and CA Chevreux, two equity brokerages owned by France’s Crédit Agricole. The preliminary offer document remains rather vague on synergies that might be derived from these ventures, which are obviously still at an early stage.

It can be surmised that one of CITIC Securities’ aims will be to make further inroads in the active and profitable ECM market in Hong Kong. Many Chinese institutions still face charter restrictions on investing outside of China, and this will imply beefing up its international distribution platform. Arguably, CITIC Securities has been lagging behind domestic rivals China International Capital Corp (CICC) and, especially, Bank of China International (BOCI) in this area. Progress in primary equity should also help to actively drive secondary sales and trading, not to mention wealth and asset management.

CITIC Securities also stands to benefit from the increasing issue of offshore Yuan (CNH) securities, especially in Hong Kong. Down the line, there may also be business elsewhere in Asia, although it’s hard to identify immediate opportunities.

Last May, CITIC Securities made headlines as the first billion-dollar Chinese IPO in Hong Kong with an all-Chinese bookrunner cast. China Construction Bank and Industrial and Commercial Bank of China, Ltd., in addition to its own investment banking arm, have been appointed, alongside Agricultural Bank of China Ltd., BOCI and Bank of Communications Limited.

However – and no doubt a sign of more challenging market conditions – Bank of AmericaMerrill Lynch, CLSA, HSBC and Morgan Stanley have since been added as international co-ordinators on the deal.

CITIC Securities has a dominant and – in some areas – almost unassailable position in China. Provided the new issue discount is attractive, it could prove a better play than several other listed houses in the region. But there’s still some mileage to go before it joins the global bulge bracket.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at https://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 6 September 2011 and is reproduced with permission.]

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