Investment banking in China is becoming increasingly cutthroat. To keep up, China International Capital Corp wants to raise about $1 billion in a Shanghai secondary listing. The capital could help it fend off Wall Street rivals and fund mergers as officials push industry consolidation. As local peers also race to become super-brokerages, a lot is riding on the flotation.
As China’s first Sino-foreign investment bank, $11 billion CICC for years has profited by brokering deals for state behemoths thirsty for overseas money. It began losing market share with the rise of mom-and-pop investors, who prefer trading smaller private companies. Partner Morgan Stanley exited in 2010, and five years later CICC raised over $800 million in a Hong Kong stock sale before taking over China Investment Securities in a $2.5 billion deal that brought more retail customers.
The bank enjoyed a 62% jump in first-half net profit thanks to vigorous trading and roles on initial public offerings such as the one for chipmaker Semiconductor Manufacturing International. CICC ranks second on Refinitiv’s Chinese equity league tables this year, behind Citic Securities , and is joint sponsor on the upcoming mega-listing of Alibaba’s fintech affiliate Ant.
CICC’s capital hike has not exactly been a good advertisement for its business so far, however. In July, it said it would triple the offering size because the original amount was insufficient. And yet, without explanation, it is now sticking with the $1 billion target. One possible explanation is that Beijing intervened because of CICC’s role in the recent Luckin Coffee scandal.
The smaller equity sale could pose a problem. CICC’s net capital, at $4.6 billion, is light compared to peers. One key risk control ratio – core capital to total assets – was around 10% at the end of 2019, putting it on regulatory radars. CICC also isn’t very efficient. Gross profit represents just 8.1% of total tangible assets, according to Market Grader Capital analysts.
With the intensifying competition, CICC could use all the firepower it can get. Another merger may be necessary to keep up with a potential $70 billion combination of Citic and China Securities. Smaller rivals are also trying to get bigger. Time, and cash, is of the essence.