Buy order

Everbright: brokering deals

Fung King Key couldn’t even speak English when the diminutive Hong Kong financier visited New York in 1980. But that communications drawback didn’t stop Manhattan’s borough president from hyping his arrival in the city. Not only did he declare it “Fung King Key Day”, he told his fellow New Yorkers that Fung’s financial conglomerate Sun Hung Kai (or SHK) was “the Merrill Lynch of Hong Kong”.

The comparison was carefully chosen, since Merrill Lynch was courting Fung frantically at the time. Two years later it spent $82 million – then its largest overseas investment – to gain a 25% stake in SHK’s brokerage operation and 15% in its banking unit.

An expansionary Merrill wanted access to Fung’s wealthy Chinese contacts. In exchange, Fung got a 4% holding in the US firm, plus convertible notes equating to a further 10% stake. It made him the largest single shareholder in Merrill.

Unfortunately for Fung he didn’t enjoy that for status for long. That’s because when Hong Kong’s stock market crashed (Sino-British talks over the territory’s future made investors jittery) he was forced to offload his Merrill stake to keep SHK afloat.

Fung died in 1985 and control of SHK has changed hands several times since. In the latest twist, the Hong Kong brokerage has become part of a Chinese giant.

China’s Everbright Securities said this month that it has agreed to buy a 70% stake in SHK Financial, SHK’s brokerage and wealth management service unit, for HK$4.1 billion ($529 million).

“It marks the end of an era and the beginning of a new one,” a Sina blogger wrote, noting how it is reflective of closer connections being forged between mainland China’s and Hong Kong’s stock markets. For instance, the Shanghai-Hong Kong Stock Connect, a trading programme allowing foreign investors to buy Shanghai-listed shares and vice versa, was implemented late last year. A similar trading scheme between the Hong Kong and Shenzhen bourses is planned too.

Everbright is one of a number of Chinese brokerages making forays into Hong Kong. Haitong Securities took over Chow Tai Fook’s brokerage unit in 2009 and renamed it Haitong International. Likewise, in a deal that was completed in 2013, Citic Securities acquired Hong Kong-based broker CLSA.

The Chinese brokers are choosing Hong Kong for their first acquisitions overseas, buying the local houses for their client lists and know-how.

After the recent run-up in the domestic stockmarkets, they also have more cash to do deals. Profits at Everbright rose 10-fold last year to a little over Rmb2 billion ($320.1 million), with its shares more than tripling in value in the last two months of 2014.

In fact, there were more than 10 bidders for SHK Financial, according to Hong Kong media reports, and Everbright paid a rich premium for its new asset. According to Securities Times, the deal valued the Hong Kong firm at 1.8 times its net book value and nearly 30 times recent earnings. For comparison, Haitong International is only trading at 11 times its 2013 net profit.

According to Singtao Daily, other Chinese firms are in buyout talks with other Hong Kong brokers. “It is because of the convergence between Hong Kong and China’s financial markets,” the newspaper suggests.

But if asking prices get any higher it may make more sense for the Chinese brokers to build their own teams in the city.

In the meantime, cross-border ties continue to deepen. Hong Kong’s chief executive CY Leung told an industry conference this week that the afore-mentioned Shenzhen-Hong Kong scheme is expected to launch in the second half of this year. This will trigger more capital flows, Securities Times notes, thanks to the proximity of the two cities, as well as the attraction of investing in promising private sector firms listed in Shenzhen.

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