Money in the bank

Bi Mingjian: CEO of CICC

It can often be hard to keep up with the changes in China’s financial services industry, not least due to the rise and fall of the shadow banking sector over the past few years. But one trend is clear: both Alibaba and Tencent are intent on being key players.

And their competition stepped up another notch last month following the news that Alibaba has invested HK$1.8 billion ($230.6 billion) in CICC, a leading local investment bank, at roughly HK$15.5 per share.

According to a stock exchange filing, the investment has raised Alibaba’s holdings in CICC to 11.74% of its H-shares and 4.84% overall. This makes Alibaba the third largest shareholder behind government-owned Central Huijin Investment and Tencent, which purchased a 12.01% H-share stake and 4.95% overall at HK$13.8 per share in 2017.

It is the first time that both internet giants have ploughed money into the same securities firm and interestingly, it seems that Alibaba purchased the stake off-market from Singapore’s Government Investment Corp (GIC).

GIC was formerly CICC’s second major shareholder, having boosted its stake in 2010 after Morgan Stanley walked away from the company it co-founded in 1995.

That GIC decided to sell the stake off-market says a lot about how Asia’s equity capital markets have changed in recent years. The growth of both the private equity and institutional investment management industry means that there are now a lot of big players in the region, capable of absorbing sizeable blocks of shares that would have previously been sold via the public equity markets.

Alibaba’s decision to purchase the stake also makes a lot of sense, even though Tencent’s earlier investment in CICC seems to have generated little mutual business so far.

What the two internet giants have always shared in common is a desire to build up financial empires that match their e-commerce and social networking ones.

However, for all the hype on fin-tech, financial regulators have been reluctant to allow internet firms to take a majority stake in investment banks. Alibaba’s attempt to take over Tebon Securities in 2015, National Business Daily pointed out, eventually lapsed as the deal could not obtain regulatory approval.

The apparent embargo means Alibaba and Tencent have tweaked their fintech business models towards providing technology and Big Data expertise to existing players rather than compete head-to-head with domestic financial services players. And CICC is an obvious partner. According to Sohu Finance, Alibaba’s latest move could be seen as an investment in “government relations” given that CICC is arguably the best-connected investment bank in China (see WiC257).

On the investment banking side, CICC has long stood out for its pioneering role bringing blue chip Chinese companies to offshore equities markets. And top of the list is Alibaba, which went public in New York in 2014.

More recently, CICC’s investment management platform (private equity, mutual funds and asset management) has been a big earnings driver. This is where Alibaba’s help is likely to prove invaluable.

That, at least, is the view of the CICC’s chief executive Bi Mingjian. He says that Alibaba’s fintech capabilities can help CICC accelerate the transformation of its wealth management business.

CICC already has a competitive wealth management platform, particularly for high net worth (HNW) investors. Analysts consistently flag the firm as one of the best stocks to play the theme of the wealth accumulation of China’s growing middle class. Alibaba’s CICC investment will also complement its existing stake in Huatai Securities, which targets the lower end of the HNW spectrum.

The group is also likely to be keen on CICC because of synergies with the bank’s international footprint.

For example, in Pakistan Ant Financial – an Alibaba affiliate – is purchasing a 45% stake in mobile payments firm Telenor Microfinance Bank. Meanwhile, CICC established a partnership with Habib Bank late last year to broker deals for Chinese companies operating in the country, notably those connected with the Belt and Road Initiative.

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