SHK Financial looks to Qianhai for growth

Brokerage firm hopes to repeat Hong Kong success amid headwinds from increased regulatory measures and tighter credit environment

PUBLISHED : Monday, 03 March, 2014, 2:59am
UPDATED : Monday, 03 March, 2014, 2:59am

Sun Hung Kai Financial, one of the oldest brokerage firms in the city, is pinning its hopes for growth on its establishment of a presence in Qianhai, as it contends with headwinds from increased regulatory measures amid a tight credit environment.

"Qianhai is our first step into the mainland," chief executive William Leung Wing-cheung said. "If we can repeat what we have done in Hong Kong in some cities on the mainland, our revenue can grow [sharply]."

The company signed a letter of intent to participate in Qianhai with a mainland developer in 2012.

Financial institutions in Hong Kong are all seeking a foothold in the Qianhai economic zone in Shenzhen. The zone was set up in July 2012 as a testing ground for the free flow of yuan and other policies to encourage overseas investment.

IPO sponsorship business is not a major revenue source ... we could give [it] up
William Leung, SHK Financial

The proposal by Guangdong authorities to set up a free-trade zone, which will cover Hong Kong, Macau, Qianhai, Hengqin in Zhuhai, and Nansha in Guangzhou, was greeted with mild surprise by Sun Hung Kai Financial since it already has a presence in Hong Kong and Macau.

With 45 years of presence in Hong Kong, Sun Hung Kai Financial is classified as a Category B company, which is the second tier of brokerage firms in terms of market share.

The 51 Category B brokerage firms handled 33.6 per cent of the turnover volume, according to Hong Kong stock exchange data in January.

Category A companies comprising the top 14 brokerage firms handled 54.3 per cent of volume.

Leung told the South China Morning Post Sun Hung Kai Financial was reviewing its strategy in initial public offerings after its investment banking subsidiary, Sun Hung Kai International, was fined HK$12 million by the Securities and Futures Commission in January.

The company's licence to provide advisory service on corporate finance was suspended for a year after deficiencies were found in the sponsorship work relating to the listing of Sino-Life Group on the Growth Enterprise Market in 2009.

"The IPO sponsorship business is not a major revenue source to us. We could give up the business after evaluating the risk and revenue," Leung said.

Regulatory issues aside, intensified competition in the brokerage business and the credit squeeze from banks would be a big challenge to the sector, especially for smaller firms, he said.

The SFC tightened oversight of the listing market last year, with tougher rules for sponsors such as criminal liability for misleading statements in prospectuses. Under the new rule, bankers face up to three years in jail and a fine of HK$700,000 if they fail in their due diligence of listing candidates.

"We are not saying that we will quit the market of IPO [sponsorship]," Leung said, adding it "will take the time [while the licence is suspended] to assess and decide on the next step".

The strong interest in various new share offerings had resulted in a shortage of margin financing services provided by brokers to retail investors, a common way for small players to leverage their position to get more shares.

Leung, a veteran banker who previously worked as a top executive at Hang Seng Bank, said some banks were cutting credit to brokers on such margin financing. In some offerings, since there is only one receivable bank to handle all the applications, some believe interest rates could be raised as a result.

"Some big brokerage firms can still get credit from banks though the interest rate is higher," he said. "But the smaller ones struggle to afford the price … and may lose out on the opportunities in IPO margin financing."