China brokerage deal has more bark than bite

Guotai Haitong Securities Co

09/09/2024 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Hudson Lockett
       HONG KONG, Sept 9 (Reuters Breakingviews) - It’s hard to
deny the impact of merging $17 billion Guotai Junan Securities
 601211.SS  with its $14 billion cross-town rival Haitong
Securities  600837.SS . The proposed share swap between the two
Shanghai-based firms will, if approved, create a financial firm
with assets of nearly $230 billion. That will knock Citic
Securities  600030.SS  from its throne as China’s biggest
brokerage. But size isn't everything.
   State tabloid Global Times hailed the deal as the first big
step to consolidating the sector and furthering Beijing’s
efforts to build a “first-class investment bank”. That tracks
with comments from securities regulator head Wu Qing, who in
March said that China would create around 10 leading securities
firms by 2035, including two to three globally competitive
investment banks.
    In truth, the Guotai-Haitong hybrid will do more for the
former goal than the latter. Haitong Securities, once the
outperformer of the pair, was a major player in helping Chinese
property firms like China Evergrande  3333.HK  and HNA raise
dollar-denominated debt — until that business collapsed,
saddling offshore subsidiary Haitong International with serious
losses. 
    That Hong Kong-listed unit was taken private in January, and
Haitong proper reported a 48% year-on-year revenue drop in the
first half of 2024. Concerns over the company's operations have
mounted after the former co-head of its investment banking
division was detained and extradited to China after fleeing to
Laos, just days before the merger’s announcement. 
   Guotai has fared better, with revenue down just 7% in the six
months to the end of June and its Shanghai-listed shares
basically flat over the past year, compared to a 12% fall for
Haitong. That leaves it relatively well-placed to sort through
Haitong’s troubles. As one Guotai insider put it to
Breakingviews, though, there was little appetite for the merger
“because nobody likes to eat shit”.
    Since both Guotai and Haitong ultimately answer to
Shanghai’s government, there is little reason to doubt the deal
will go through. But in terms of bookrunning prowess, the two
brokers together accounted for only about 10% of Chinese equity
capital raising by value last year, per Dealogic data. That's
well behind Citic at 15%, which along with fellow industry
heavyweight CICC also boasts a sizable offshore presence -
unlike either of the merging companies.
    Such a big tie-up may at the very least cajole some of the
country's other 146 brokerages into considering deals of their
own. But Wall Street powerhouses like Goldman Sachs and JPMorgan
don't need to worry that a new, globally competitive investment
bank will enter the fray any time soon. 
    Follow @KangHexin on X
    
    CONTEXT NEWS
    Guotai Junan Securities plans to merge with Haitong
Securities through a share swap pending shareholder and
regulatory approval, per exchange filings on Sept. 5. The
combined entity will have assets of about 1.6 trillion yuan
($225 billion), outstripping industry leader Citic Securities.
    In March, China Securities Regulatory Commission head Wu
Qing said China would seek to create around 10 leading firms in
the sector by 2035, including two to three globally competitive
investment banks.

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Graphic: Guotai shares have outperformed other brokers    https://reut.rs/3MCFIdF
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 (Editing by Antony Currie and Aditya Srivastav)
 ((For previous columns by the author, Reuters customers can
click on  LOCKETT/  
hudson.lockett@thomsonreuters.com))