Banking & Finance

Brokering a deal

Ex-Citic team acquires Sinolink Securities


Swallowing an elephant

According to The Classic of Mountains and Seas, or Shanhaijing, a text on ancient creatures and sacred geography that has circulated in China for thousands of years, a bashe is a giant snake capable of swallowing an elephant. Eating the mythic beast was a wonderful tonic that prevented heart disease and digestive trouble.

China’s domestic media believes that a more conventional snake and elephant analogy is an apt one for the acquisition of Chengdu-based Sinolink Securities by its much smaller rival, Wuxi-based Guolian Securities. The two announced the deal on September 20 as the first merger of two A-share listed brokerages.

Both entities’ share prices had gone limit-up on the trading day before the announcement, suggesting that the market’s famous ‘crocodiles’ (the local term for insider traders) were out in force too. In fact, the drums have been beating since mid-June as investors bet on faster consolidation and better performance from the brokerage sector. Individual brokers have seen their share prices rise by 20-25% in the past three-and-a-half months.

Citic Securities, for example, is up 27%. Citic, China’s largest broker, is also rumoured to be close to taking over its nearest rival, CSC Financial, although both have denied that a deal is in the works.

Dreams of becoming more of a rival to Citic seems to have spurred Guolian’s takeover of Sinolink. Its growth strategy is being spearheaded by Citic’s former chief technology officer Ge Xiaobo, who became Guolian president in 2019. He took a group of Citic executives with him when he made the move, including Wang Jinling , now Guolian’s chief operating officer, and Wang Jie, its company secretary.

Guolian floated in Shanghai in July (it had originally listed in Hong Kong back in 2015). Thanks to the merger, it will jump up the rankings of China’s 47 listed brokers to 18th in terms of assets.

Analysts have generally liked the deal, saying that Guolian will benefit from Sinolink’s online broking and investment banking business. In the first half of 2020, it reported a 51.4% increase in revenues to Rmb4.3 billion ($633.1 million), with proprietary trading accounting for the majority of sales, followed closely by underwriting and brokerage.

In turn, Guolian has a coveted mutual fund advisory licence after it joined the government’s pilot programme in March with six other domestic brokers.

Guolian’s ultimate controller is the State Council’s Sasac branch in Wuxi, a city in Jiangsu. Sinolink’s ownership hails more from the private sector – Yongjin Group, a financial service group based in Shanghai but with roots in Hunan province.

This kind of M&A looks set to be repeated as the owners of small and medium-sized brokers are forced to adhere to a new regulatory regime unveiled by the People’s Bank of China (PBoC) last month.

Under the new rules, financial holding companies must meet new minimum capital thresholds of Rmb5 billion. The regulations, which will become effective on November 1, with a one-year grace period, are designed to stop companies from diversifying into financial services without adequate capital. But they also seem set to prompt an industry shakeout, with other rumoured mergers including a tie-up between First Capital and Beijing Capital, which are both owned by the Beijing municipal government.

Consolidation among China’s 100-plus brokerages will get further impetus if speculation that banks could soon be granted securities licences turns out to be accurate.

Earlier this summer Caixin reported that two banks would be selected to take part in a pilot programme to create brokerages of their own that can compete on a global scale against international rivals.

In the meantime the brokerage industry is going through a healthier period after five difficult years following the stock market’s 2015 crash.

CICC – one of the more established local investment banks – believes that the onset of another round of capital market reforms marks “a new cycle of regulatory relaxation and business innovation”. That is spilling over into the brokerage sector: expect a lot more activity in primary and secondary issuance, with the leading firms grabbing more market share from smaller contenders, CICC says.

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