Across The Border

China’s mid-sized brokerages seen buying Hong Kong rivals

Facing competition and consolidation in China, the country’s medium-sized brokerages are eyeing rivals in Hong Kong as they seek to expand

PUBLISHED : Sunday, 07 August, 2016, 8:09pm
UPDATED : Sunday, 07 August, 2016, 8:52pm

Hong Kong will see more brokerage houses acquired by mainland rivals, as these mid-sized securities firms expand overseas business amid severe consolidation in their home market.

Shanghai-listed Soochow Securities entered into a memorandum of understanding with Hong Kong-listed Skyway Securities Group, to acquire at least 51 per cent of Skyway by subscribing to new shares, according to a Skyway statement filed with the Hong Kong bourse on July 29.

Medium-sized brokerages rarely venture overseas to buy Hong Kong firms, though bigger firms made the jump years ago.

Soochow ranked at 21 among 125 mainland securities firms last year, with 70 billion yuan in total assets, according to data from the Securities Association of China. Companies in the top 10 generally had assets of more than 200 billion yuan.

Kenny Wen, Hong Kong-based wealth management strategist at Sun Hung Kai Financial, said more such deals will occur in the city.

“There are at least two mainland companies on the way to starting brokerage businesses in Hong Kong. It has become a trend,” Wen said.

Wang Xiaojun, analyst with Cinda Securities, said: “Soochow Securities’ move is a bit surprising. In the past, most cross-border acquisitions were done by big securities firms because they have the capital, larger business coverage, and the eagerness to expand overseas.”

There are at least two mainland companies on the way to starting brokerage businesses in Hong Kong. It has become a trend
Kenny Wen, Sun Hung Kai Financial

The mid-sized brokerages were clearly speeding up their overseas expansion, Wang added.

Mainlanders growing interest in buying Hong Kong stocks through the Shanghai-Hong Kong Stock Connect cross-border share trading scheme is one of the reasons that has propelled brokers to strengthen positions in the city.

Asset management and corporate financing businesses are even bigger pies that mainland financial securities firms can take a slice of, as more than half of the companies listed in Hong Kong are mainland firms.

Wen said that a cross-border acquisition gives mainland firms the paperwork required by Hong Kong’s Securities and Futures Commission, such as the Type 6 licence for corporate finance and a Type 9 licence for asset management.

Wen described such deals as “each to their own”, given that local brokers are also willing to increase exposure to China following the Shanghai stock link and the upcoming Shenzhen stock connection.

Soochow’s move came after Everbright Securities, the second largest broker with 158.9 billion yuan in total assets, finalised its acquisition of a 70 per cent stake in Sun Hung Kai Financial last year.

The first purchase of a Hong Kong brokerage by a mainland rival came in 2009, when Haitong Securities acquired Hong Kong-listed Tai Fook securities, now known as Haitong International Securities Group.

“Tai Fook didn’t bring much in the way of earnings to Haitong, but it had overseas clients, and the acquisition was also a trial run before Haitong entered other foreign markets such as Europe,” Wang said.

With China’s securities companies undergoing consolidation, cross-border acquisitions may help mid-sized brokerage houses transition into specialised boutique firms, said Qian Jun, professor of finance at Shanghai Advanced Institute of Finance.

Financing demand from small and mid-sized mainland firms in Hong Kong is a niche market, one that bigger investment banks are not interested in, Qian said.

“Such cross-border acquisition deals will certainly increase in the future. Hong Kong’s gloomy economic growth has created bargains for mainland financials holding lots of cash. But the question remains whether any two parties can integrate well,” he said. “Most merger and acquisition participants underestimate the integration difficulties.”

Besides possible divergence in acquisition price and terms that could kill a deal at the beginning, differences in regulation, operating strategy and management between the two markets could take longer than expected for mainland firms to navigate, Qian said.

Hong Kong is a nice first step for mainland firms “going out”, however the second step might be several times harder to take, he added.