Haitong sees new era for mainland market in 2012

Haitong Securities, the second-largest brokerage firm in China, says the launch of new financial products next year could give the mainland market a boost in 2012.

Yuan exchange traded funds and an extended scope for securities margin trading will be introduced next year and will help increase investor interest and shore up transaction volumes on the mainland markets, said Wang Kaiguo, chairman of Haitong.

The brokerage will kick off its US$1.7 billion initial public offering in Hong Kong this week. Both Haitong and Citic Securities will float their shares in the city as mainland security firms pursue a process of internationalisation in terms of branding, recruitment and staff training.

Meanwhile, Reuters reported yesterday that US private equity firm Warburg Pincus will invest US$210million in Haitong's offering, making it one of its largest investments in China, and said Japan's Chuo Mitsui Trust had agreed to be a cornerstone investor in the IPO.

Haitong, which had four million clients on the mainland by the end of September, acquired Tai Fook Securities in Hong Kong in 2009 for more than HK$1.8 billion. Wang said it would continue to acquire brokerage firms in the near term to increase its sales network on the mainland, Hong Kong and wider Asian markets.

However, the broker has scaled back the size of its Hong Kong IPO to US$1.7 billion, from an initial US$2billion, on concerns over the uncertainty in global markets and its impact on the mainland market.

'China has some, but not as much policy flexibility as it did three years ago,' said Tim Moe, Goldman Sachs' co-head of economics, commodities and strategy research in Asia.

The market regulator has tight control over the short-selling of stocks, said Wang, leaving little room for investors to make profits when the market is down. As a result, market turnover on the Shenzhen and Shanghai stock exchanges had shrank substantially to below 100 billion yuan each (HK$120 billion) per day at present, in light of the financial turmoil in global markets.

If turnovers dropped to below 50billion yuan a day, no brokerage could make a profit, Wang said.

Transaction volume is crucial to Haitong because trade-related sales, including brokerage commission fees and margin financing, account for more than 51 per cent of total sales. The Shanghai-based brokerage firm saw its net profit drop more than 45 per cent year-on-year to 490 million yuan in the third quarter.

Citic Securities, a larger competitor to Haitong, saw an even bigger plunge in net profit, which shrank 74 per cent year-on-year in the three months ended September.

Wang hoped that the revenue contribution from trading-related sales would decrease to 40 per cent in the long term as contributions from private equity funds, investment banking and other products grew.